In a Nutshell: A Commodity is an asset like oil, corn, soy, copper, gold or coco etc. that is often bought as a hedge against inflation or as a portfolio diversifier.

Definition: A commodity is a basic good—such as grain, gold, oil, beef or natural gas—which is most often used as an input for the creation of other goods and services. Commodities are usually bought and sold through an exchange called the Chicago Board of Trade, and typically in the form of futures contracts. These are often highly volatile assets subject to significant price moves based on forces beyond ordinary analysis—such as geopolitics (i.e. with oil) or weather (i.e. with grains, corn, coco etc). There are also ETF’s that investors can buy to articulate their desire for commodities exposure in everything from natural gas and agriculture to precious metals.

Advantages: For investors looking to balance their portfolios into an asset class that is not correlated to stock and bond markets, commodities can be a diversifier, provided they are properly weighted/allocated. Similarly, for those seeking a hedge to potential inflation risks, commodities—in particular precious metals like silver and gold—tend to protect investors and outperform in inflationary markets.

Risks: Commodity price risk can result from such things as rapid changes in productivity, political risks, weather or regulatory conditions etc. Commodities are often vulnerable to one or all of these external factors. The sudden decline of Chinese GDP, for example, after years of almost unheard of growth, dramatically impacted the price of nearly all commodities—most notably oil—which suffered a sudden drop-off in price.
​
Further Reading: Commodities like gold are often part of portfolios; see “Inflation & Growth as Portfolio Signals.”