If commodities hedge inflation, why own the companies?

Investors building real-asset allocations often face a basic choice: own commodities directly, or own the businesses that produce them. Direct commodity exposure has an intuitive appeal. When commodity prices rise, the investment should participate. But inflation sensitivity is only one part of the decision. Long-term return matters too.

Recurrent compared natural-resource equities with both spot and futures commodity exposure over the 20 years ended January 2024. The return gap was substantial.

Resource equities delivered materially higher total returns.

From January 31, 2004 through January 31, 2024, the S&P Global Natural Resources Index generated a 6.67% annualized return. The S&P GSCI spot index returned 3.86% annualized, while the S&P GSCI Total Return futures index returned -1.27% annualized.

Companies can create cash flow even when the commodity goes nowhere.

Resource equities and commodities have both historically offered positive sensitivity to inflation, but the economic structures are different. A natural-resource company can generate operating cash flow, reinvest, pay dividends and repurchase shares. A commodity itself does not produce cash flow, and futures exposure can be helped or hurt by the shape of the futures curve.

The historical record is not long enough to make sweeping claims about every inflation regime. But over the period where comparable data are available, resource equities preserved much of the inflation-sensitive behavior investors seek from commodities while offering meaningfully stronger total-return characteristics.