CFA Level I Exam · Natural Resources

Ways to Invest and Risks in Natural Resources

Updated 7 October 2026 · Fact-checked

You can gain natural resource exposure directly (owning the physical asset or land), through derivatives and funds (futures, ETFs, commodity funds), or through equities of producers. Direct and futures routes track commodity prices closely. Equities add company risk. Key risks are price volatility, storage, roll, liquidity, regulatory and event risk.

Understand Ways to Invest and Risks in Natural Resources

Natural resources are assets such as energy, metals, agricultural products, timberland and farmland. Investors use them for inflation protection, diversification and return. The first question is how closely the investment tracks the underlying commodity price, and what extra risks come with the route you choose.

Direct investment means owning the physical commodity or the land. You get the purest exposure. But you pay for storage, insurance and transport, and the asset produces no income. Physical ownership works for gold, and for farmland or timberland. Land can produce income (crops, timber sales, leases) and has biological growth in timber. Direct holdings are illiquid and need specialist management. Many commodities, such as crude oil, are impractical to hold physically.

Indirect exposure through derivatives and funds includes commodity futures, exchange-traded products (ETFs/ETNs), commodity index funds and managed funds. Futures need little cash up front and are liquid, but returns depend on the futures curve. In contango, rolling contracts costs money. In backwardation, roll yield tends to be positive. ETFs and funds give easy access but may have tracking error, fees, and in some cases counterparty risk (for example, exchange-traded notes carry issuer credit risk). Private funds and real asset partnerships may lock up capital for years.

Equity-based exposure means buying shares of producers, miners, drillers, agribusiness or timber companies, or funds holding them. Equities are liquid and may pay dividends. But returns reflect management quality, leverage, costs, hedging, and general stock market moves, not only commodity prices. Correlation with the commodity can be modest, so diversification is weaker than with direct or futures exposure. Producers who hedge output may also gain less from a price rise.

Risks and diversification. Commodity prices are volatile and driven by supply shocks, weather, demand cycles, geopolitics and currency moves (many are priced in USD). Regulation, environmental liability and property rights add risk, as does valuation difficulty for private assets. Commodity returns often have low or modest correlation with stocks and bonds, and can respond to inflation, so they can diversify a portfolio. That benefit is not constant and can fall in a crisis.

Key formulas to remember

Commodity futures return: Total return = spot return + roll yield + collateral return; A futures investor earns the spot return, plus the roll yield, plus interest on the cash collateral. Equivalently, futures return = change in futures price, plus collateral return. Both forms give the same total.
Roll yield sign rule: Backwardation (futures < spot): roll yield positive | Contango (futures > spot): roll yield negative; This applies to a long position that rolls to a new contract. It describes the typical effect, not a guarantee of total return.
Exposure ranking by closeness to commodity price: Direct / futures > commodity funds and ETFs > producer equities; A general guide. Equities carry company and equity market risk, so they track commodity prices least closely.

How to solve Ways to Invest and Risks in Natural Resources questions

Use this approach for any question on routes to natural resource exposure or their risks.

1Identify the route in the stem: physical or land, futures, ETF/fund, or producer equity.
2Ask what the return depends on: commodity spot price, futures curve, or company performance.
3List the costs and extra risks of that route: storage and insurance, roll and collateral, tracking error and issuer risk, or leverage and management risk.
4Check liquidity and income: physical land is illiquid but may earn income; futures and ETFs are liquid; equities pay dividends.
5Judge diversification: closer tracking of the commodity usually means lower correlation with stocks, and equities correlate more with the stock market.
6Eliminate options that attach the wrong risk to the route, then choose the one that fits all the facts.

Quickest way: Route, driver, risk

When to use it: For three-option questions asking which approach or risk fits a scenario, when you have about 90 seconds.

Label the route in a few words.
Name its one main driver: spot price, curve, or company.
Match the signature risk: storage (physical), roll (futures), tracking or counterparty (funds), company and market (equities).
Cross out the two options that contradict this match.

Common mistakes in Ways to Invest and Risks in Natural Resources

Treating producer equities as a pure commodity play.
Mining and oil company profits rise with prices, so it seems the same exposure.
Fix: Remember equities carry management, leverage, hedging and equity market risk, so correlation with the commodity is lower.
Saying futures-based investors earn only the change in the spot price.
Students forget that a futures investor's return has more parts than the spot change alone.
Fix: A futures investor earns spot return plus roll yield plus collateral return, not the spot change alone. The roll yield can be positive or negative depending on the shape of the futures curve.
Reversing the roll yield sign.
Contango and backwardation are easy to confuse.
Fix: Contango means futures above spot, so rolling a long position loses. Backwardation is the opposite.
Ignoring holding costs of direct ownership.
Focus on price gain and purity of exposure.
Fix: Include storage, insurance, transport and illiquidity. Most commodities produce no income, unlike farmland or timberland.
Assuming ETFs carry no risk beyond price.
Exchange-traded products feel simple and liquid.
Fix: Consider tracking error, fees, roll costs and, for exchange-traded notes, issuer credit risk.
Claiming commodities always diversify.
Low average correlation is overstated as a rule.
Fix: Say commodities often give diversification and inflation sensitivity, but correlations vary and can rise in stress.

Worked examples

Example 1

An investor wants the closest tracking of crude oil prices with no physical storage of barrels. Which approach best fits? A. Shares of an oil producer B. Long positions in crude oil futures C. Buying and storing physical barrels

Show the solution

The investor wants no storage, so C is ruled out.
Producer shares reflect company, leverage, hedging and equity market risk, so they track oil prices less closely. A is out.
Futures are tied directly to oil prices, need no storage, and are liquid, so they give the closest tracking without storage.
Futures still carry roll and collateral effects, but these do not change which option tracks oil most closely without storage.

Answer: B

Example 2

A long futures investor holds a commodity whose futures price is above spot (contango). Spot price is unchanged over the year and collateral earns interest. Which statement about the roll yield is correct? A. It is negative B. It is zero C. It is positive

Show the solution

Futures above spot means contango.
Rolling a long position sells the expiring cheaper contract and buys the dearer one.
As futures converge to spot, the long position loses value from the roll.
So roll yield is negative, partly offset by the collateral yield.

Answer: A

Exam tips

Match each route to its signature risk: storage, roll, tracking or issuer, company and leverage.
Expect questions comparing correlation: equities of producers track the commodity least closely.
Watch the contango and backwardation sign, and remember futures return is the change in futures price plus collateral return, which breaks into spot, roll and collateral parts.
Do not pick an option using absolute words such as always or never about diversification.
If stuck, eliminate options that give physical-ownership costs to futures or roll to physical land.

Practice questions from Natural Resources

Ways to Invest and Risks in Natural Resources: frequently asked questions

What are the main ways to invest in natural resources?

There are three: direct ownership of physical commodities or land, indirect exposure through futures, ETFs and funds, and equity exposure through producer companies. Each differs in cost, liquidity and how closely it follows the commodity price.

Are commodity ETFs better than futures or producer equities?

Not always. ETFs are convenient and liquid but can have tracking error, fees and roll costs. Futures are direct but need active rolling. Equities add company and market risk. The best choice depends on the investor's goal.

What risks do commodity investments carry?

The main risks are price volatility, storage and insurance cost for physical holdings, roll costs for futures, tracking and counterparty risk for funds, and company risk for equities. Regulatory, environmental and geopolitical risks also apply.

Do natural resources diversify a portfolio?

They often have low to modest correlation with stocks and bonds and can respond to inflation. This benefit varies over time and can weaken during market stress, so it is not guaranteed.