One of the oft-cited reasons for investing in commodities is that they have historical returns comparable to stocks while having a low correlation to the stock market. The problem is that this statement is patently false.
Yes, commodities used to have low correlations to stocks. But that was before the era of “financialization” and securitization.
In their 2011 paper “Index Investment and Financialization of Commodities,” Princeton University Professor Wei Xiong and Renmin University of China Professor Ke Tang prove empirically what many of us in the profession have long suspected: Commodities and commodity stocks are becoming more highly correlated to each other and to other asset classes.
Furthermore, while the prices of individual commodities have always been volatile, commodity prices as a whole have also become far more volatile in recent years.
The question begs to be asked: Why?
Tang and Xiong place the blame on the slew of ETF and mutual fund products that offer stock investors passive, indexed access to commodities. Whereas...
