Passive investing in commodities is a bit of an oxymoron.

Unlike popular equity indices, which are weighted by market capitalization, leading commodity indices are based on more arbitrary construction methodologies—the main one being that commodities produced in larger quantities carry more weight within the indices.

In this paper—the third installment in our series on the potential limitations of passive investing—we show how passive commodity investing amounts to a series of active decisions that, in our view, can lead to suboptimal risk-adjusted performance versus a more thoughtful investing framework.

And for additional perspective on the potential pitfalls of indexation, please see The Fine Print of Indexation and The Limitations of Passive Investing to Achieve a Net-Zero Outcome.