Conquering Misperceptions about Commodity Futures Investing

16 Pages Posted: 21 Aug 2015 Last revised: 23 May 2016

See all articles by Claude B. Erb

Claude B. Erb


Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Date Written: May 22, 2016


Long-only commodity futures returns have been very disappointing over the last decade, leading some to wonder if it was a mistake to invest in commodities. The poor performance is the result of poor “income returns” and not of falling commodity prices. This observation may be surprising for many commodity investors who were not aware, who misperceived, they were making a bet on income returns, a return building block similar to a stock’s dividend yield or a bond’s yield. For investors seeking an inflation hedge, it may be surprising that the historical linkage of commodity returns with inflation seems to be the result of a connection between commodity income returns and inflation, not, as commonly misperceived, commodity price returns and inflation. It may be surprising that the value of commodity investments is smaller than the market capitalization of Facebook, a potentially striking misperception for investors seeking a portfolio diversifier with abundant capacity. There has been no change in the way that price returns and income returns drive the total returns of stocks, bond and commodities. What has changed is that maybe a good number of commodity investors now realize that they were operating outside of their “circle of competence” and did not have a sense of what future price and income returns could be and would be.

See our earlier papers on commodity investing: The Strategic and Tactical Value of Commodity Futures - The Golden Dilemma - The Golden Constant - An Impressionistic View of the ‘Real’ Price of Gold Around the World -

Keywords: Commodity futures, price return, roll return, real return, inflation, backwardation, contango, asset class, inflation hedge, market timing, trading strategies

JEL Classification: G12, G13, E44, Q11, Q41, Q14

Suggested Citation

Erb, Claude B. and Harvey, Campbell R., Conquering Misperceptions about Commodity Futures Investing (May 22, 2016). Financial Analysts Journal, Forthcoming, Available at SSRN: or

Claude B. Erb

TR ( email )

CA 90272
United States

Campbell R. Harvey (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)


National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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