3 reasons why a broad commodities exposure can benefit client portfolios
There has been a lot of demand for the safe haven of gold in 2025, while global central banks as well as investors in general remain bullish. Yet the precious metal is part of a wider commodities complex that holds several benefits that can aid client portfolios.
Conversations with advisors and clients looking to diversify their commodity exposure beyond gold have led BMO ETFs to introduce the BMO Broad Commodity ETF or ZCOM.
Fund in focus
What is ZCOM?
- All-in-one, low-cost commodity exposure (management fee: 0.29%).
- Tracks or seeks to replicate, to the extent possible, the performance of the Bloomberg Commodity Index Total Return (BCOM TR), following 24 commodities: precious metals (23%), industrial metals (15%), agriculture (29%), energy (27%), & livestock (6%).
- Rebalances annually. Risk rating: Medium.1
*Bloomberg as of September 30, 2025.
Global central banks are still bullish gold, with survey data showing that they are still looking to increase their allocations over the next several years. This is a bullish signal which could see gold hit US$4,500 per ounce by mid-2026.
Clients may ask – why not just buy gold? A few reasons.
- Diversified commodity exposures have a low correlation3 to equities and reduce concentration risk. Gold can still correct while inflation remains high.
- Shortages in industrial metals, or surges in oil prices are common during periods of geopolitical risk, and benefit commodities.
- Agriculture tends to outperform during climate related events. For example, coffee prices have doubled over the last 2 years because of droughts and tariffs (geopolitical risk).
- Commodities may experience a price boom because of trade frictions and barriers that are leading to increases.
Adding commodities ETFs to a portfolio can help investors tap into new opportunities while strengthening diversification. As the table below shows, commodities have shown low to negative correlation with stocks and bonds.
Correlation table: the darker the green represents how correlations differ. A number between -1 and +1 indicates how strong the relationship is. A value close to 1 or -1 indicates a strong relationship, while a value closer to 0 indicates a weak or nonexistent relationship.
Source: Bloomberg, as of September 30, 2025. Commodities = BCOM Total Return Index, Canadian Fixed Income = FTSE Canada Universe Bond Index, Canadian Corporate Bonds = FTSE Canada All Corporate Bond Index, U.S. Fixed Income = Bloomberg Barclays U.S. Aggregate Index, Canadian Equity = S&P/TSX Composite, U.S. Equity = S&P 500, International Equity = MSCI EAFE.
3 reasons commodities benefit portfolio construction
From a portfolio construction perspective, we’ve identified three key reasons an exposure to ZCOM can benefit your client:
- Commodities are an excellent diversifier. BCOM TR has low to negative correlations with stocks and bonds. Consider 2022, when both equities and bonds were firmly in the negative. The BCOM index was +16.09% in that year. Correlations between stocks and bonds tend to be higher during inflationary periods, and expectations remain elevated for persistently stickier inflation.
- Commodities are an excellent inflation hedge for portfolios. U.S. consumer price index (CPI4) data going back to 1977 show that in months where CPI has increased more than 25 basis points, commodities have delivered more than double the returns of stocks and bonds.
- Commodities help reduce standard deviation5 versus average model 60-40 portfolios (see chart below).
The case to shift away from 60/40: Stocks and bonds tend to correlate more when core inflation is higher
Source: BMO Global Asset Management. 3-year correlation between S&P 500 and U.S. Treasury Index.
In addition, the return structure of ZCOM is diversified. The primary driver of returns is commodities prices, but investors can also benefit from two additional components: roll return, stemming from the closing and opening of new futures contracts,2 as well as collateral return. ZCOM uses ultra short-term, high-quality U.S. corporate bonds to potentially generate additional yield above U.S. treasuries.
Returns driven by 3 components
Source: BMO Global Asset Management. For illustrative purposes.
Gold + greater diversification, inflation protection
Commodity cycles are typically quite long because supply cannot increase overnight in large scale mining, energy and agricultural projects. Commodity prices can increase with supply constraints, as well as from geopolitical shocks and broad macroeconomic conditions.
The gold outlook remains bullish, however investors seeking to diversify their commodity exposure to gold plus other precious and industrial metals, energy, agriculture and livestock can consider ZCOM, for low correlation to equities and return potential.
In the current market of geopolitical frictions and trade barriers, commodities may help guard against rising consumer prices and build overall portfolio resiliency.
1 All investments involve risk. The value of an ETF can go down as well as up and you could lose money. The risk of an ETF is rated based on the volatility of the ETF’s returns using the standardized risk classification methodology mandated by the Canadian Securities Administrators. Historical volatility doesn’t tell you how volatile an ETF will be in the future. An ETF with a risk rating of “low” can still lose money. For more information about the risk rating and specific risks that can affect an ETF’s returns, see the BMO ETFs’ prospectus.
2 Futures Contract: a standardized legal agreement to buy or sell a specific asset at a predetermined price at a specified time in the future.
3 Correlation: a statistical measure describing the strength and direction of a relationship between two or more variables. Positive correlation indicates similar movements, up or down together, while negative correlation indicates opposite movements (when one rises, the other falls).
4 Consumer Price Index (CPI): a measure that tracks the average change over time in the prices paid by consumers for a basket of goods and services — such as food, housing, transportation, and healthcare. It’s a key indicator of inflation and helps show how the cost of living is rising or falling.
5 Standard Deviation: a measure of risk in terms of the volatility of returns. It represents the historical level of volatility in returns over set periods. A lower standard deviation means the returns have historically been less volatile and vice-versa. Historical volatility may not be indicative of future volatility.
Disclaimers
For Advisor Use.
This material is for information purposes only. The information contained herein is not, and should not be construed as investment, tax or legal advice to any party. Particular investments and/or trading strategies should be evaluated and professional advice should be obtained with respect to any circumstance.
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Commodity-linked derivative instruments are financial contracts whose value is derived from the price of an underlying commodity.
The BMO Broad Commodity ETF is an exchange traded alternative mutual fund within the meaning of NI 81-102. As an alternative mutual fund, the BMO ETF has the ability to invest in asset classes and use investment strategies that are not permitted for conventional mutual funds, including the ability to invest in other alternative mutual funds, employ leverage and borrow cash to use for investment purposes and increased ability to invest in commodities. While these strategies will be used in accordance with the BMO ETF’s investment objective and strategies, during certain market conditions, they may accelerate the pace at which an investor’s investment decreases in value.
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Published: October 2025.