Commodity investing needs an upgrade

Commodities are back in the spotlight

After years of underperformance and under-allocation, a growing number of investors are reconsidering the role of real assets within portfolios. Inflation remains structurally higher than many anticipated just a few years ago, geopolitical fragmentation is reshaping global supply chains, and a new investment cycle centred on electrification, artificial intelligence, energy security and infrastructure spending is driving demand for physical resources across the world.

Yet while the investment case for commodities appears increasingly compelling, the reality is that traditional commodity strategies have often fallen short of expectations. For many investors, the experience has been characterised by disappointing returns, prolonged drawdowns and diversification benefits that failed to materialise when they were needed most.

As the world enters a new phase of economic and industrial transformation, commodities remain highly relevant. However, we argue that capturing the opportunity requires a more modern approach than simply buying a passive commodity index.

The new economy still depends on the old economy

One of the defining misconceptions of recent years has been the belief that technological progress somehow reduces the importance of physical assets.

The opposite is true.

The technologies that are transforming the global economy are extraordinarily resource intensive. Artificial intelligence requires data centres, power generation and transmission networks. Electrification requires copper, nickel, lithium and rare earth metals (such as neodymium, dysprosium and praseodymium). Energy security demands investment across both traditional and renewable energy systems. Reindustrialisation and defence spending require steel, aluminium and other industrial inputs.

Beneath every digital trend sits a foundation of physical infrastructure and raw materials.

Industry estimates suggest the world may need to produce as much copper between now and 2050 as has been produced in all of human history.

 

 – Robert Shimell, Portfolio Manager, Diversified Alternatives

This dynamic forms part of what we describe as the “Seven Ds” (Exhibit 1) driving commodity markets: long-term structural themes that are reshaping both demand and supply. From decarbonisation and deglobalisation to demographics and defence spending, these forces are creating a supportive backdrop for real assets that could persist for many years. Whereas the last commodities Supercycle, in the 2000s, was predicated on Chinese growth and lack of supply the current Supercycle has 7 core structural drivers.¹

Exhibit 1: The seven structural drivers of the new commodities supercycle

^{Source: Janus Henderson Investors}

What is particularly striking is how underappreciated many of these commodity-related opportunities remain. While investors have enthusiastically embraced the beneficiaries of technological innovation, far less attention has been paid to the materials and infrastructure required to enable that growth.

In many respects, commodities look increasingly central to the future economic landscape while remaining peripheral in investment portfolios.

Why traditional commodity investing has struggled

The challenge is not the asset class itself. It is often the way investors access it.

For much of the past two decades, commodity investing has been synonymous with passive futures-based indices. The proposition seemed straightforward: gain direct exposure to commodities, diversify equity and bond portfolios, and provide portfolios with good performance during inflationary environments.

In practice, results have frequently been less compelling.

One reason is that commodity futures are not the same as owning physical commodities. Futures contracts expire and must be rolled forward. During periods when markets are in contango, meaning future contracts are more expensive than near-term contracts, investors can experience a persistent drag on returns through negative roll yield.

The consequence is that commodity prices may rise while investor returns lag considerably behind.

Another challenge is the severity of commodity bear markets. Long-only commodity indices can experience deep and prolonged drawdowns during periods of oversupply, weak economic growth or shifting policy environments (such as between mid-2011 and Q1 2020). Unlike active strategies, passive approaches have little flexibility to adapt when market conditions deteriorate.

Exhibit 2: Passive commodity investing has often fallen short of investor expectations

^{Source: Janus Henderson Investors, Bloomberg, data from 31 December 1969 to 31 January 2026.}

Diversification has also proved less dependable than many investors expected. Commodities are often viewed as a portfolio diversifier, yet correlations with equities have historically risen during periods of recession and market stress. When economic growth weakens, commodity demand often falls alongside corporate profits, causing both asset classes to come under pressure simultaneously (for example during the Great Financial Crisis (GFC) and COVID).

Exhibit 3: Commodity diversification benefits often weaken during market stress

^{Source: Janus Henderson Investors, Bloomberg, data from 31 December 1969 to 31 January 2026.}

The result is that investors have often received a more volatile and cyclical experience than the original sales pitch implied.

The opportunity beyond futures

A further limitation of traditional commodity indices is that they only capture a portion of the broader real asset universe.

Most futures benchmarks focus on a relatively narrow set of exchange-traded contracts weighted according to production and liquidity. While this provides representative exposure to commodity futures, it excludes many areas that are becoming increasingly important in the modern economy.

Critical minerals such as lithium, uranium and rare earth elements are absent from traditional indices. So too are businesses operating across the broader commodity value chain, including processors, refiners, transport operators, utilities and infrastructure providers.

These companies often sit at the centre of major structural trends, yet they remain inaccessible through conventional commodity benchmarks. Their weights in broader equity benchmarks have also fallen significantly over the past 3 decades (during which the weight of the technology sector has surged), leaving many investors underexposed.

For investors seeking exposure to the full commodity opportunity set, we believe that futures alone can be insufficient.

A more comprehensive, more dynamic approach

If traditional commodity investing has limitations, what might a better solution look like?

We believe the answer lies in combining two distinct but complementary sources of return: active commodity derivatives and natural resource equities.

Active commodity derivatives can offer direct exposure to commodity price movements and provide the flexibility to profit from both rising and falling markets. A systematic long/short approach allows risk to be managed more actively while reducing the dependence on a single bullish commodity regime.

This flexibility is particularly valuable in an asset class known for boom/bust cycles and significant volatility. Rather than simply buying exposure and waiting for prices to rise, investors may potentially benefit from changing market conditions across both bull and bear markets.

Natural resource equities provide a different set of advantages. They broaden the opportunity set beyond futures markets and offer access to businesses operating across the global resource ecosystem. These companies can benefit not only from higher commodity prices but also from operational improvements, earnings growth and dividend income.

Importantly, they provide exposure to parts of the commodity complex that are otherwise difficult to access, including many of the resources most closely linked to decarbonisation, energy security and industrial transformation. In addition, natural resource equities can more easily facilitate sustainable investing principles than futures.

While each approach has strengths and weaknesses when viewed individually, together they can be highly complementary.

Exhibit 4: A modern commodity allocation could deliver better risk-adjusted outcomes

^{Source: Janus Henderson Investors, Bloomberg. For illustrative purposes only. Model portfolio is a simulated back test and does not represent live performance. Data is from 31December 1995 to 31 January 2026. All returns are gross in USD. Past performance is not a reliable indicator of future returns and should not be relied upon. Simulated Past performance does not predict future results.}

Building a better real asset allocation

Commodity solutions can be engineered to deliver the specific outcomes investors seek – diversification, inflation resilience, attractive long-term returns and portfolio protection during changing macroeconomic environments. This requires an active approach.

Combining long/short commodity derivatives with natural resource equities can potentially create more balanced and resilient commodities exposure. Derivatives can potentially provide flexibility, liquidity and downside protection. Equities broaden the opportunity set, provide access to the wider natural resources value chain and allows the incorporation of sustainable investing principles and income via dividends.

Exhibit 5: Model portfolio vs BCOM – Rolling drawdown since inception

^{Source: Janus Henderson Investors, Bloomberg. For illustrative purposes only. Model portfolio is a simulated back test and does not represent live performance. Data is from 31December 1995 to 31 January 2026. All returns are gross in USD. Past performance is not a reliable indicator of future returns and should not be relied upon. Simulated Past performance does not predict future results}

Taken together, they can create a more comprehensive, dynamic and adaptive approach than either futures-only or equity-only solutions.

Most importantly, they align more closely with the way commodity markets themselves are evolving.

Exhibit 6: Why a broader commodity approach may offer superior portfolio outcomes

Source: Janus Henderson Investors, Bloomberg. For illustrative purposes only. Model portfolio is a simulated back test and does not represent live performance. Data is from 31December 1995 to 31 January 2026. All returns are gross in USD. Past performance is not a reliable indicator of future returns and should not be relied upon. Simulated Past performance does not predict future results

Looking ahead

The world is entering a period that may prove increasingly supportive for real assets.

The transition to cleaner energy systems, the build-out of AI infrastructure, ongoing geopolitical tensions and renewed industrial investment all point towards sustained demand for natural resources. At the same time, supply growth remains constrained across many commodity markets after years of underinvestment.

For investors, the strategic case for commodities has rarely appeared stronger.

But simply owning a traditional commodity index may not be enough.

As the relationship between the physical and digital economies becomes ever more interconnected, investors need to rethink not only whether they allocate to commodities, but how they access the opportunity. A broader, more dynamic and outcome-oriented approach could ultimately prove better suited to capturing the next chapter of the commodities story.