The Harbor Commodity All-Weather Strategy ETF has matched the S&P 500's performance since the fund was launched in February 2022 - but it has been a much smoother ride

When an investor is having difficulty deciding what to do as market conditions change and wants to take less risk, a customary response is that it is best to have a diversified portfolio.

But over short periods, prices for stocks and bonds tend to move up and down together. And if you are a typical index-fund investor tracking the S&P 500 SPX, you might already be aware that the largest companies are dominant because the index is weighted by market capitalization.

This means the group of megacap tech companies known as the Magnificent Seven - Apple Inc. $(AAPL)$, Microsoft Corp. $(MSFT)$, Nvidia Corp. $(NVDA)$, Amazon.com Inc. $(AMZN)$, Alphabet Inc. $(GOOGL)$, Meta Platforms Inc. $(META)$ and Tesla Inc. $(TSLA)$ - make up 30.8% of the SPDR S&P 500 ETF Trust SPY. If we add Berkshire Hathaway Inc. $(BRK.B)$, Broadcom Inc. $(AVGO)$ and Elly Lilly & Co. $(LLY)$, the portfolio is 36% concentrated to its largest 10 holdings. So much for diversification within the benchmark U.S. large-cap stock index.

If you want a higher level of diversification within your portfolio, you can add exposure to commodities. It is easy to do this by holding gold or buying shares of an exchange-traded fund that holds metals, but you might also go for broader exposure through a fund such as the Harbor Commodity All-Weather Strategy ETF HGER. The fund is rated five stars (the highest rating) within Morningstar's U.S. Fund Commodities Broad Basket category.

HGER is subadvised by Quantix Commodities. During an interview with MarketWatch, Matthew Schwab, head of investor solutions at Quantix, and Andrew Miller, director of research at Harbor Capital Advisors, explained how the fund is managed to be flexible through all market conditions.

Before digging further into the strategy, take a look at this chart showing how HGER has performed from its inception on Feb. 9, 2022, through Wednesday, in comparison with the SPDR S&P 500 ETF and the S&P 500. All returns in this article include reinvested dividends and are after funds' expenses, which are 0.68% of assets under management for HGER and 0.0945% for SPY:

The overall returns have pretty much been the same, with HGER and SPY trailing the S&P 500 slightly - the index has no fund-manager expenses. But HGER has provided a smoother ride for investors, as it held up well during the broad stock-market decline in 2022 and has shined this year.

This chart shows the action from Feb. 9, 2022 (when HGER was established), through the end of that year.

And so far in 2025, HGER has returned 4.5%, while the S&P 500 has declined 4.6%.

Fuel for fear

In a report on Wednesday, BCA Research U.S. bond strategist Ryan Swift wrote in a note to clients that "a falling stock market and sticky bond yields represent the worst of both worlds for investors."

The yield on 10-year U.S. Treasury notes BX:TMUBMUSD10Y is higher than it was a year ago, which means bond prices are lower, because "inflation expectations are higher" and the term premium for long-term bonds has increased, Swift wrote.

"While term premium estimates are necessarily imprecise, there is some logic to the idea that greater uncertainty about the inflation impact of tariffs and fiscal policy has caused bond investors to demand more compensation for taking duration risk," Swift wrote.

Again leaving aside opinions about policy, Swift's colleague Arthur Budaghyan, BCA's chief emerging markets/China strategist, wrote in a note on Wednesday: "Unlike during Trump 1.0, the current Trump administration is working towards strategic objectives. Hence, the current U.S. administration will be more tolerant of short-term pain than previous ones." Budaghyan added that President Donald Trump's goal of increasing U.S. industrial output would require "either import tariffs, currency depreciation, or a combination of both."

"Notwithstanding periodic short-term rebounds, the path of least resistance for global share prices remains down. The resilience of European and Chinese stocks in the face of the U.S. equity selloff is unsustainable," Budaghyan wrote.

HGER strategy

The Harbor Commodity All-Weather Strategy ETF tracks the Quantix Commodity Index, which is designed to provide protection against inflation. Its main strategy is to pursue what is known among commodity traders are "roll yield." Rather than simply betting that certain commodity prices will rise, this strategy takes advantage of periods when current spot prices are high and demand is expected to decline over the long term.

When current spot prices are high and futures prices going out several years are lower, that commodity market is in a situation known as backwardation.

During a period of backwardation, if a money manager is maintaining a portfolio of futures going out several years, profits (roll yield) can be made by selling futures contracts expiring in the near term, while purchasing contracts with maturities further out.

Matthew Schwab at Quantix described commodity investments as the "ultimate hedge" against inflation, while emphasizing that the index tracked by HGER had been designed to protect individual investors. He also pointed out that because of the way commodity-futures trading works, most of the fund's assets at any time are earning interest, which now means a yield of close to 4.5% because the federal-funds rate is in a target range of 4.25% to 4.50%. So at a time when short-term rates are higher as the Federal Reserve works to hold down inflation, the fund has an automatic cushion.

Andrew Miller at Harbor said: "If you were uncertain, you would be in T-bills anyway. With this you get that spread, with potential commodities earnings on top. You can think about it from an insurance perspective."

Schwab explained that the roll-yield strategy is most often applied to crude oil. "Petroleum is more liquid. It is the most inflation-sensitive commodity," he said.

Miller said that the fund was designed "to screen in and out of commodities."

"We shift in and out of gold. We can go up to 40% gold in the index, which is where it is now," he said. The fund has been heavily invested gold since roll yields became unattractive last year.

Gold for April delivery (GC00) was trading at $2,949.10 an ounce early Thursday on the New York Mercantile Exchange. That was up 11.6% from $2,641 at the end of 2024, according to continuous front-month futures prices tracked by FactSet. The price of gold was up 35% from a year earlier, up 49% from three years earlier and up 94% from five years earlier.

Schwab said the increase in gold prices reflected a broad change in the policies of central banks (excluding the Federal Reserve) to increase their gold holdings after decades of declines, according to data compiled by the International Monetary Fund and Bloomberg.

Schwab concluded by saying: "When you are worried, diversification is the way to address that worry." And that doesn't only mean spreading risk within the stock or bond markets.

HGER's commodity-focused strategy to hedge against inflation has led to investment performance differentiated from those of stocks and bonds.