Commodities

In the original and simplified sense, commodities were things of value, of uniform quality, that were produced in large quantities by many different producers; the items from each different producer were considered equivalent. On a commodity exchange, it is the underlying standard stated in the contract that defines the commodity, not any quality inherent in a specific producer's product.

One of the characteristics of a commodity good is that its price is determined as a function of its market as a whole. Well-established physical commodities have actively traded spot and derivative markets. Generally, these are basic resources and agricultural products such as iron ore, crude oil, coal, salt, sugar, coffee beans, soybeans, aluminum, copper, rice, wheat, gold, silver, palladium, and platinum.

Commodities are generally regarded as an asset class for very knowledgeable investors using advanced portfolio strategies.

Arguments for
In a US context, the arguments in favour of investing in commodities, through mutual funds or ETFs (not futures), as part of a diversified portfolio of stocks and fixed income, are as follows:
 * Over the long term, the returns of multi-commodity indexes are reported to be similar to that of stock market indexes
 * The volatility of multi-commodity indexes is supposed to be similar to that of stocks
 * Commodities have a low correlation with other asset classes so can be portfolio diversifiers
 * Commodities are a hedge against inflation

Arguments against
In a US context, the arguments against investing in commodities, through mutual funds or ETFs (not futures), as part of a diversified portfolio of stocks and fixed income, are as follows:
 * According to Rick Ferri, "there is no agreed upon way to measure the commodities market as an asset class. Commodity indices are primarily investment strategies that employ radically different weighting and rebalancing schemes."
 * A study by the Bank for International Settlements found heightened correlations between commodity and equity prices from September 2008 continuing through 2012, because "the factors driving commodity prices have changed". Therefore, commodities may not be reducing the risk of stock-heavy portfolios anymore.
 * The same study found that "Most if not all the returns from investing in commodities come from the (active) skill of the portfolio manager rather than the (passive) properties of commodity derivatives themselves."

In a Canadian context, the Toronto Stock Exchange main index contains companies strongly influenced by the price of oil, natural gas, gold, base metals and so on, so investors having exposure to Canadian stocks may have no need to add any commodities to their portfolios.

Commodity futures
Commodities are traded on commodities exchanges around the world, often as futures. A futures contract is "a type of derivative instrument, or financial contract, in which two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price". When transacting commodity futures, buyers and sellers can have two objectives: speculate on commodity prices, or hedge risk. Because there is a large amount of leverage involved, you can loose more than your original investment when buying a futures contract.

Commodity funds
Investing in commodities can be done through funds of various types, including exchange-traded funds. These can cover single commodities, or commodity baskets.