Sep 20, 2010
How can investors achieve exposure to commodities by investing in stocks?

EFF/KRF: Many companies have long positions in commodities and gain when commodity prices rise. Energy companies, for example, have reserves of oil, gas, and coal, and profit when energy prices rise. Other companies, such as airlines, buy commodities and suffer when prices rise. 

Conceptually, investors can manage their exposure to commodity prices by increasing or reducing their ownership of firms that are positively or negatively exposed to commodity prices. This is probably not, however, an efficient way to manage commodity exposure. Few firms' fortunes are driven solely or even predominantly by commodity prices. Oil refiners and airlines, for example, are both affected by labor costs, regulations, taxes, economic conditions, and many other factors. An investor who adjusts his exposure to oil by increasing his allocation to either oil refiners or airlines also changes his exposure to all these other factors.

Eugene F. Fama
The Robert R. McCormick Distinguished Service Professor of Finance at the University of Chicago Booth School of Business
Kenneth R. French
The Roth Family Distinguished Professor of Finance at the Tuck School of Business at Dartmouth College
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Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to Dimensional Fund Advisors LP.