Accept No Substitutes: Why Natural Resources Stocks Are a Horrible Way to Get Commodity Exposure

More and more investors are considering an allocation to commodities, typically motivated by a desire to tap the inflation-fighting and diversifying properties of this asset class. While the most natural way to get commodity exposure is by investing in a portfolio of commodity futures, many investors (and consultants) believe owning a portfolio of natural resource stocks is an easier method. Yet as this paper shows, the intuitively appealing substitution of natural resource stocks for a futures-based commodity exposure offers a less effective solution for both inflation protection and diversification.