Portfolio perspectives

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Portfolio perspectives

Expert Perspective

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November 12, 2025

Each month, you’ll have access to the latest insights from our Portfolio Solutions experts to help you address evolving issues that may affect your clients’ portfolios. In this edition:

  • Current financial trends are focusing attention on commodities, which can serve as a hedge against inflation and as a diversifier in a portfolio.
  • Before changing a portfolio’s allocation by funding commodities from stocks and bonds, understand how that can alter the portfolio’s risk and return characteristics.

 

Portrait of Robert Dzubia
Rob Dziuba, CIMA®
Vanguard Portfolio Analytics and Consulting
Portrait of Robert Dzubia

Rob Dziuba, CIMA®

Vanguard Portfolio Analytics and Consulting


What to consider when funding a commodities allocation in a portfolio

Recently, we’ve received many questions about gold given investors’ increasing concerns about the risk of stagflation, the independence of the Fed, and weakening faith in fiat currencies.

Our team has directed that conversation toward diversifying portfolios into broader, uncorrelated asset classes such as international stocks and bonds. However, commodities remain a discussed alternative, especially as an inflation hedge and a potentially effective tool in portfolio construction.

Vanguard’s view: Commodities can have their purpose in a portfolio, as they offer diversification to both equity (with a correlation of 0.30) and fixed income (with a correlation of –0.01).1 However, there are trade-offs to consider when funding a commodity allocation from either equities or fixed income.

Figure 1 depicts the correlation relationship when comparing commodities with each asset class independently.

 

Figure 1: Historically, commodities have offered varying diversification against stocks and bonds

Rolling three-year correlation

A line chart depicts the rolling three-year correlation pairs between equity and fixed income, equity and commodity, and commodity and fixed income, from 1994 through September of 2025. It shows that commodities have generally had more persistently low correlation to fixed income with less stable correlations to equities. It also demonstrates the potential function of commodities as a diversifier in a portfolio, as they offer diversification to both equity and fixed income asset classes.

Source: Vanguard, based on data from BCOM Index total return, Russell 3000 Index total return, Bloomberg U.S. Aggregate Bond Index, and FactSet, as of September 30, 2025.

Commodities have generally had more persistently low correlation to fixed income with less stable correlations to equities. Many of the advisors we’re speaking with are allocating to commodities at the expense of their fixed income allocation, but they may be increasing their overall risk level by doing so. That’s because commodities tend to exhibit higher levels of volatility than fixed income. On the other hand, if equities are sold to fund an allocation to commodities, Vanguard has found the correlations between commodities and equities is more variable over time, and commodities tend to have a lower risk premium than equities in the long run, thereby tending to give up some return.2

The allocation decision to commodities that makes the most sense is one based on an outlook of higher unexpected inflation. Vanguard believes commodities could offer a strong positive relationship to unexpected inflation. While this relationship can vary over time, Vanguard has found a beta between 6x and 10x between commodities and unexpected inflation.2 However, consider that commodities exhibit overall volatility that is significant relative to another effective inflation-hedging instrument—Treasury Inflation Protected Securities (TIPS). Also, investors with long time horizons will find that equities have historically outperformed inflation. For those investors with sensitivity to inflation over the short-term, commodities can be a higher-octane option as an inflation-hedging instrument, given their historically strong, positive co-movement with unexpected inflation shifts.

Turning to today’s conditions, inflation is still well below its COVID-period peaks, yet it continues to be a concern given tariff policies. Investors commonly raise fiscal deficits as a source of concern. For investors who perceive greater risk to these thus-far-understated issues exacerbating inflation, an allocation to commodities may make sense.

While commodities can offer some bulwark against inflation, they offer a lower risk premium than equities and can add risk when funded from fixed income. Funding from equities may lead to underperformance versus a market-cap-weighted portfolio, while funding from fixed income increases portfolio volatility. Vanguard believes commodities are best suited for investors highly concerned about unexpected inflation and willing to accept greater volatility compared with TIPS.

Potential solutions to consider

The circumstances prompting our most recent advisor discussions about commodities do not appear prone to quick or easily implemented solutions. Concerns about stagflation, perceptions of the Federal Reserve Board’s autonomy, and challenges to historical confidence in fiat-based money are but a few reasons investors might express a heightened interest in commodities. If you determine the diversifying and inflation-hedging potential of commodities outweigh the previously mentioned trade-offs, consider Vanguard Commodity Strategy Fund (VCMDX). Alternatively, if countering inflation in a manner consistent with TIPS is more your focus, consider taking a look at our Inflation-Protected Securities Fund (VAIPX), Short-Term Inflation-Protected Securities Index Fund (VTAPX), or Short-Term Inflation-Protected Securities ETF (VTIP).

If you’d like to perform a deeper dive on portfolio strategies for mitigating inflation or diversifying beyond fixed income and equities, reach out to your Vanguard representative for more information. 

Partner with Vanguard Portfolio Solutions

Commodities can potentially meet the needs of investors seeking to hedge a portfolio against inflation and diversify from stocks and bonds. Our team can help you game out different commodity allocation and funding strategies, equipping you with the data you need for informed portfolio construction decisions.

Request a consultation

 

1 FactSet data, as of September 30, 2025.

2 Anatoly Shtekman, Fei Xu, Victor Zhu, Ziqi Tan, and Stefan Sevi. Commodity investing and its role in a portfolio. Vanguard, 2023. 

 

More Vanguard analysis

For additional expert insights, check out:

  • Advisor trends: Find out how your portfolios stack up in comparison with your advisor peers'.
  • Market perspectives: Turn to Vanguard's senior economists each month for projected returns and monthly economic highlights on inflation, growth, and expected Fed actions.
  • Active fixed income perspectives: View our quarterly, in-depth commentary for a sector-by-sector analysis and a summary of how those views affect the Vanguard active bond funds.
  • ETF industry perspectives: Get the latest ETF trends and insights from our investment experts to help you address issues that may affect your clients' portfolios.

 

Notes:

  • For more information about Vanguard funds or Vanguard ETFs, view detailed product information or call 800-997-2798 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
  • Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.
  • All investing is subject to risk, including possible loss of principal. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account.
  • Diversification does not ensure a profit or protect against a loss.
  • Vanguard is not responsible for determining what's in the best interest of any underlying client on whose behalf you use this information. As an investment advisor, it remains your responsibility to make a best-interest determination for your clients, so you should review carefully the information presented and the fund's prospectus for more complete information regarding any fees, expenses, investment objectives, and risks, and make your own determination as to its appropriateness before you rely on it.
  • Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer's ability to make such payments will cause the price of that bond to decline.
  • Vanguard Commodity Strategy Fund could lose all, or substantially all, of its investments in instruments linked to the returns of commodity futures or other commodity investments. Commodity futures trading is volatile, and even a small movement in market prices could cause large losses. 

    Investments in derivatives may involve risks different from, and possibly greater than, those of investments in the underlying securities or assets. 

    Although inflation-indexed bonds seek to provide inflation protection, their prices may decline when interest rates rise and vice versa. 

    The fund is subject to currency hedging risk, which is the chance that currency hedging transactions may not perfectly offset the fund's foreign currency exposures and may eliminate any chance for the fund to benefit from favorable fluctuations in relevant currency exchange rates. The fund will incur expenses to hedge its currency exposures.
  • The Inflation Protected Securities Fund, Short-Term Inflation Protected Securities Index Fund and Short-Term Inflation-Protected Securities ETF invest in bonds that are backed by the full faith and credit of the federal government and whose principal is adjusted periodically based on inflation. The funds are subject to interest rate risk because although inflation-indexed bonds seek to provide inflation protection, their prices may decline when interest rates rise and vice versa. The funds’ quarterly income distributions are likely to fluctuate considerably more than the income distributions of a typical bond fund. Income fluctuations associated with changes in interest rates are expected to be low; however, income fluctuations associated with changes in inflation are expected to be high. Overall, investors can expect income fluctuations to be high for the funds.