An introduction to commodities

Gas pipes. An introduction to commodities

If you’ve watched Trading Places, you’ll recall the Dukes’ somewhat rudimentary depiction of the world of commodities and their role as brokers, as well as the sometimes frantic activity in the trading pits. In the 40 years since the movie’s release, most “open outcry” trading pits have been replaced by more efficient electronic trading systems, and additional safeguards and regulations have been introduced. Here, we explore the commodity asset class and its role in investor portfolios.

Using the Bloomberg Commodity Index (“BCOM”) as a proxy, commodities can be grouped broadly into energy, metals and agriculture commodities, but also can be split into the following sub-sectors. 

Figure 1. Commodity futures and the exchanges where they are traded
Commodity futures and the exchanges where they are traded

For illustrative purposes. Source: Invesco. 

The evolution of the futures exchange

Some commodities are still bought and sold in a traditional, physical transaction, but most trading now takes place on the futures exchanges and over-the-counter market. The Chicago Board of Trade (CBOT) was created in 1848 as a cash market for grain farmers looking for potential buyers. In 1865, the CBOT introduced the standardised futures contracts that we know today, making transactions more efficient and opening the door to other participants.

There are now futures exchanges in financial hubs across the world, but the most relevant for most investors are the CBOT, Chicago Mercantile Exchange (CME), New York Mercantile Exchange (NYMEX), Commodity Exchange (COMEX), Intercontinental Exchange (ICE) and London Metal Exchange (LME). A commodity’s futures tend to trade on just one exchange.

The standardisation aspect is vitally important. A futures contract has precise specifications, including the quantity and quality of the commodity to be delivered, as well as the expiration and delivery dates. Each commodity future will have specified contract months that can be traded. 

Figure 2. Example: Corn futures contract specifications (partial list)

Units per contract

5,000 bushels

Price quotation

Cents per bushel

Min price movement

¼ cent per bushel (one tick = $12.50 per futures contract)

Trading hours

Monday – Friday 8:30am – 1:20pm (out-of-hour trading also available)

Settlement method


Termination of trading

On the business day prior to the 15th day of the contract month

Last delivery date

Second business day following last trading day of the delivery month

Grade and quality

#2 Yellow corn at contract price

#1 Yellow corn at a 1.5 cent/bushel premium

#3 Yellow corn at a 2-4 cent/bushel discount depending on broken corn and other damaging factors

iSource: Chicago Board of Trade, August 2023

The most actively traded contracts tend to be those for the nearest delivery month (the “front month”). Futures trades are cleared centrally, and margins are paid by the clearing members. Today, futures are traded not only by those interested in the physical commodity but also by investors who want exposure to the commodity’s price but do not want to ever take physical delivery.

Gaining exposure to commodities

While you could buy and hold some commodities physically, it is costly and extremely inefficient when you factor in transportation, storage and insurance costs. You would also have to locate someone willing to sell you the commodity and negotiate a price and delivery terms with them.

If you don’t want to hold the physical commodities (most people don’t) but instead simply want exposure to their prices, futures may be a better alternative. You’ll need to remember to close out your long futures position or roll it into another month’s contract before it expires, unless you want someone showing up at your front door to deliver a lorry-full of the commodity. Futures can be cost-effective because you only need to put up a fraction of the contract value, called margin. You may be required to top it up whenever the futures price goes down – known as a margin call.

However, the most popular way most investors gain exposure to commodities is through exchange-traded products. You can gain exposure to a single commodity’s price via an exchange-traded commodity (ETC) or to a basket of commodities, such as those represented by the BCOM Index, via an ETF. Investing in these types of products provide simple, cost-efficient exposure without having to worry about receiving margin calls, rolling the futures or having a lorry turn up at your front door.

Why invest in commodities

Commodities can provide investors with three potential benefits:


As an asset class, commodities show low correlation with equities and bonds, which is particularly useful for achieving portfolio diversification. Individual commodities may be driven by a wide range of factors including politics, regulations, weather, seasonality, the economy, replacement, supply and demand, which are different from those impacting equity and bond prices. How much should be allocated to commodities depends on the composition of the existing portfolio, but studies suggest 5-10% may make a meaningful improvement to the typical risk-return profile.

Figure 3. Asset class correlations


MSCI World

S&P 500


UST 7-10

US Corps

BBG Commodity

MSCI World



S&P 500









UST 7-10






US Corps







BBG Commodity







iiSource: Bloomberg, correlation of daily returns between 30 June 2003 and 30 June 2023.

Inflation hedge

Commodities tend to be positively correlated to inflation, with rising commodity prices often a contributing factor in higher inflation readings. We have witnessed this in recent years with rising energy and food prices stoking multi-decade highs in inflation around the globe. 

Figure 4. Correlation of US asset class annual returns with core CPI

iiiFor illustrative purposes only, based on calendar year data, 1959-2019. “Core CPI” refers to US core inflation. All asset returns are CPI-adjusted and are in total return format, unless stated otherwise: “Cash” is the 3mth US T-bill total return until Dec 2018 and then the Bank of America Merrill Lynch (BAML) 0-3mth treasury total return index; “Gold” is the London bullion market spot price in USD/troy ounce; “Commodity” is the Reuters CRB Total Return Index until November 1969 and then the Standard & Poor’s Goldman Sachs Commodity Index (S&P GSCI) from Dec 1969; “Government Debt” is an Invesco calculated total return based on 10 year treasury yield until Jan 1978 and is based on BAML US treasury index thereafter; “Investment Grade Credit” is based on GFD’s AAA Total Return index until Feb 1976 and then BAML US Corporate Index. Past performance is no guarantee of future results. Source: BAML, CRB, Global Financial Data, Refinitiv Datastream, Robert Shiller, Standard & Poor’s, S&P GSCI, GPR, and Invesco.

Growth opportunities

Commodities also provide potential growth opportunities linked, for example, to emerging market growth or the transition to a low-carbon global economy. Demand for industrial metals would be expected to grow as an expansive economy spends on building out infrastructure, housing, etc, while many of these materials are also used in solar, wind and other renewable energy technologies. In agriculture, some grains – especially corn – are used not only to feed the world but also to feed into the production of biofuel. These are just some of the potential growth opportunities you can access via an investment in commodities.

Find out more

Watch this video from Kathy Kriskey, Senior Commodity Strategist at Invesco, as she discusses the main benefits of investing in commodities, including what they may offer for today’s portfolios.

Invesco’s commodity ETFs

Our new ETF tracks an index that tilts weightings to commodities with lower GHG emissions in the production process, whilst reducing exposure to those with higher GHG emissions.

Investment risks

  • For complete information on risks, refer to the legal documents.

    The value of investments, and any income from them, will fluctuate. This may partly be the result of changes in exchange rates. Investors may not get back the full amount invested.

    Instruments providing exposure to commodities are generally considered to be high risk which means there is a greater risk of large fluctuations in the value of the instrument.

Important information

  • This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication.

    Data as at August 2023 unless otherwise stated.

    Views and opinions are based on current market conditions and are subject to change.