Bonds and Stocks That Are Risky Can Be Reduced With This Five-Star All Weather ETF

When investors face uncertainty due to changing market conditions and seek to reduce risk, the conventional advice is to maintain a diversified portfolio. However, in the short term, stock and bond prices often move in tandem. For those tracking the S&P 500 index through index funds, it is crucial to recognize the significant concentration in a few major companies due to the index’s market capitalization weighting.

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The dominance of large technology firms is evident. The group known as the "Magnificent Seven"—Apple Inc., Microsoft Corp., Nvidia Corp., Amazon.com Inc., Alphabet Inc., Meta Platforms Inc., and Tesla Inc.—accounts for 30.8% of the SPDR S&P 500 ETF Trust (SPY).

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When including Berkshire Hathaway Inc., Broadcom Inc., and Eli Lilly & Co., the ten largest holdings make up 36% of the ETF. This level of concentration limits the diversification within the U.S. large-cap stock index, making portfolios more vulnerable to the performance of a handful of companies.

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To enhance diversification, investors might consider adding commodities to their portfolios. This can be done by holding physical gold or investing in exchange-traded funds (ETFs) that track commodity prices. One option for broader exposure is the Harbor Commodity All-Weather Strategy ETF (HGER), which has earned a five-star rating from Morningstar in the U.S. Fund Commodities Broad Basket category. This ETF is subadvised by Quantix Commodities and is designed to perform across varying market conditions.

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During an interview with MarketWatch, Matthew Schwab, head of investor solutions at Quantix, and Andrew Miller, director of research at Harbor Capital Advisors, explained the ETF’s strategy. HGER focuses on a method known as "roll yield," which involves capitalizing on price differences between near-term and long-term futures contracts.

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In commodity markets, when current spot prices are high but future prices are lower—a situation known as backwardation—managers can generate returns by selling near-term futures while buying contracts with longer maturities. This strategy allows the fund to profit from the price discrepancies without relying solely on rising commodity prices.

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Schwab described commodity investments as the "ultimate hedge" against inflation and emphasized that the HGER index was designed with individual investors in mind. An added benefit of commodity-futures trading is that most of the fund’s assets are held in cash-like instruments earning interest. With the federal funds rate currently in the 4.25% to 4.50% range, the fund benefits from a yield close to 4.5%, providing an additional buffer during times of higher short-term rates.

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Miller highlighted the dual advantage of HGER’s strategy. He pointed out that while uncertain investors might typically allocate to Treasury bills (T-bills) for safety, HGER offers a similar yield with the potential for additional returns from commodity exposure. This combination provides both a stable income and the possibility of gains from rising commodity prices.

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A significant portion of HGER’s roll-yield strategy focuses on crude oil, which Schwab identified as the most liquid and inflation-sensitive commodity. The fund also has the flexibility to adjust its exposure across different commodities. For example, it can allocate up to 40% of its portfolio to gold, which is its current position due to recent unattractive roll yields in other areas.

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Gold prices have shown substantial growth. As of early Thursday, gold for April delivery was trading at $2,949.10 per ounce on the New York Mercantile Exchange. This reflects an 11.6% increase from $2,641 at the end of 2024. Over the past year, gold prices have risen by 35%, while they have climbed 49% over three years and 94% over five years, according to data.

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The surge in gold prices is partly attributed to a shift in central bank policies worldwide, excluding the Federal Reserve. According to data compiled by the International Monetary Fund and Bloomberg, many central banks have increased their gold reserves after years of reducing their holdings. This shift suggests a growing preference for gold as a store of value amid global economic uncertainty.

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Beyond commodities, the broader financial landscape remains challenging. In a report, BCA Research U.S. bond strategist Ryan Swift warned that the combination of declining stock prices and persistently high bond yields creates a difficult environment for investors.

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The yield on 10-year U.S. Treasury notes remains elevated compared to a year ago, leading to lower bond prices. Swift attributed this to rising inflation expectations and increased term premiums—additional compensation investors demand for holding long-term bonds.

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Swift suggested that heightened uncertainty surrounding fiscal policy and tariffs has led bond investors to seek higher returns to offset the risks associated with inflation.

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Meanwhile, BCA’s chief emerging markets strategist, Arthur Budaghyan, noted that the current U.S. administration appears more willing to endure short-term economic pain to achieve long-term strategic goals. This approach includes measures such as import tariffs and potential currency depreciation to boost U.S. industrial output.

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Budaghyan cautioned that despite occasional market rebounds, the overall trajectory for global stock prices remains downward. He also questioned the sustainability of European and Chinese stock market resilience amid ongoing U.S. equity market weakness.

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For investors seeking to navigate this uncertain environment, the Harbor Commodity All-Weather Strategy ETF offers a diversified approach. Its focus on roll yield and its ability to earn interest on uninvested assets provide a dual source of returns.

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By incorporating commodities like crude oil and gold, the fund aims to deliver both inflation protection and consistent income, making it an attractive option for those looking to reduce risk while maintaining growth potential.

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