Written by Charles Armstrong  |

March 29, 2010

Using Grains To Diversify Your Portfolio

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Oil and gold get all the press, but grains—the stepchild of commodities—can really help diversify your portfolio.

• Diversification: how 5 different grains stack up
• One good fund for ag exposure
• Don’t be fooled by ‘no correlation’

 

As far as the major classes of commodities go, grains tend to be the forgotten stepchild. We hear about crude oil and precious metals such as gold nearly every day, but for some reason, grains, those most basic of economic inputs, are all too often neglected in financial news.

But when it comes to using commodities to diversify your portfolio, you can't beat grains.

 

The Case For Grains

The whole point of diversification is to provide exposure to varied and diverse markets so as to reduce your overall risk. Therefore, you should naturally demand that whatever commodities you invest in for the purpose of diversification have very little to no correlation with an otherwise broadly diversified stock portfolio.

It's here where grains excel. Below we've compared the continuous front-month prices of the five major grains traded on the Chicago Board of Trade—corn, oats, rice, soybeans and wheat—with the SPDR S&P 500 ETF (NYSE Arca: SPY), which tracks the S&P 500, the world's favorite benchmark for diversified stocks. The following charts show the correlations between the two from January 2004 to March 2010. (A quick review: "R_Squared" indicates the degree to which the change in one factor—in this case, a grain commodity's price—can be explained by the change in the other; here, the value of SPY.)

 

Corn

Correlation type: Positive

R_Squared: .01609

Oats

Correlation type: Posiitive

R_Squared: .1683

Rice

Correlation type: Positive

R-Squared: .00213

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