Should You Add Alternatives or Commodities to Your Portfolio?

A New Option, or a New Distraction?

Periodically, investors are introduced to new asset classes with the promise of improving their portfolios. Lately, “alternatives” and “commodities” have become buzzwords in the world of investment products, sometimes packaged as part of a fund’s “expanded opportunity set,” or offered in response to inflation, market volatility, or a desire for better risk-adjusted returns.

 

If you’re an average DIY investor, investing through your RRSP and TFSA, you might be wondering: Should I be adding these to my portfolio, too? Am I missing something by sticking with the familiar mix of stocks, bonds, and cash?

 

The interest is understandable, but the answer isn’t necessarily straightforward.

 

The Confusion and Complexity Beneath the Surface

What starts as a promise of “diversification” can quickly lead to confusion. Alternatives and commodities can behave very differently from traditional investments, and they come with structures, risks, and costs that aren’t always apparent at first glance.

 

You might find yourself looking at a fund fact sheet that now includes “private credit” or “liquid alts,” or reading that a “real asset strategy” has been added for inflation protection. The terminology can feel impenetrable, especially when wrapped in jargon or marketed through performance-based presentations.

 

And while some of these strategies have institutional roots, pension funds, for example, have long held alternatives, that doesn’t necessarily mean they’re a good fit for the average investor managing a modest portfolio with limited time for research.

 

Worse, the potential for “added value” may be marginal, and in some cases, even negative, especially after fees.

 

The Insight

As you sort through the buzzy expressions, it helps to clarify what we’re talking about, and why some investors are drawn to these asset classes in the first place.

 

What Are Alternatives?

Broadly defined, alternatives are investments that fall outside of traditional stocks, bonds, and cash. Here are the types most relevant to retail investors:

 

• Private credit: Loans to businesses that aren’t publicly traded. Higher yields are possible but with increased risk and limited liquidity.
• Private equity: Ownership in private companies, usually with long holding periods. Often inaccessible directly but can appear in packaged funds.
• Infrastructure: Toll roads, airports, utilities, etc., i.e., things meant to provide stable, long-term cash flows.
• Liquid alts / hedge strategies: Publicly traded mutual funds or ETFs that use leverage, derivatives, or shorting to reduce correlation with markets.

 

Why include them?

• Potential for diversification; returns that are less correlated with stocks and bonds.
• Possibility of higher returns due to illiquidity or complexity.
• Exposure to different sources of risk and return.

 

But be careful:

• Many come with high fees and lower transparency.
• Some are illiquid and not easily sold if you need cash.
• They may require more monitoring and due diligence than a typical DIY investor can manage.

 

What Are Commodities?

Commodities include physical goods like oil, natural gas, gold, wheat, and copper. They’re typically accessed via:

 

• Futures contracts: Often bundled into commodity ETFs but can be volatile and complex.
• Commodity-related equities: Shares of companies in the resource sector, oil & gas, mining, agriculture.
• Multi-asset funds: Some funds mix commodities with infrastructure or inflation-protected bonds.

 

Commonly cited benefits include:

• Inflation protection: commodities may rise in price when inflation spikes.
• Low correlation with stocks and bonds.
• Possible gains during geopolitical or supply shocks.

 

But again, there are trade-offs:

• Commodities don’t produce income (no dividends or interest).
• Prices can be highly volatile and driven by unpredictable factors like weather or war.
• Long-term returns are inconsistent.

 

A Canadian Caveat: Is It Really Diversification?

For Canadian investors in particular, it’s worth considering how much commodity exposure already exists in a typical domestic equity portfolio. Canada’s stock market is famously (notoriously?) resource-heavy, with significant weightings in energy (oil & gas) and materials (including mining, metals, and forestry). If you already hold a broad Canadian equity fund, you may be more exposed to commodities than you realize. In that case, adding direct commodities, via ETFs or other instruments, might not improve diversification. It might actually increase your concentration risk instead. For those who already invest with a “home bias,” the diversification benefit of adding commodities could be minimal or even counterproductive.

 

So, Do They Belong in a Traditional Portfolio?

The case for adding alternatives and commodities is strongest in institutional portfolios, i.e., large pensions or endowments with long time horizons, sophisticated research teams, and the ability to manage periods of illiquidity.

 

For the average retail investor, the benefits may be modest, and the complexity may outweigh the gains. If included, these asset classes should be used in moderation, probably not more than 5%–10% of a portfolio, and within a well-thought-out investment policy.

 

In short: they can diversify a portfolio, but they’re not a source of miraculous returns.

 

A Thoughtful Approach Is Still the Best Defence

This is where conventional wisdom still shines. A portfolio built from diversified, low-cost, transparent investments: Canadian and global equities, investment-grade bonds, and perhaps a bit of REIT exposure, remains a solid foundation. For many, it’s enough.

 

If you do choose to invest in these new asset classes, it should be done with:

 

• A clear understanding of your investment objectives.
• A comprehension of how these assets fit your risk tolerance and time horizon.
• A willingness to accept that the potential payoff may be small, and the learning curve steep.

 

It’s perfectly reasonable to explore more complex investments, but doing so requires clarity of purpose and a solid understanding of their role in your portfolio.

 

Staying Grounded in What Works

Markets evolve, and so do investment offerings. However, not every innovation is a necessary improvement for individual investors. As always, the basics remain:

 

• Save consistently.
• Invest with discipline.
• Keep costs low.
• Rebalance periodically.
• Focus on what you can control.

 

Alternatives and commodities may have a place, but they should never lead you to neglect the core principles that already serve most investors well. If you’re ever in doubt, a good question to ask is not “What’s new?” but “What’s useful for me?”

 

 

This is the 288th blog post for Russ Writes, first published on 2025-05-05.

 

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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.

 

Image credit: Created using OpenAI’s DALL·E by ChatGPT