Portfolio Optimization for Commodity ETFs under Heavy-Tailed Returns

Abstract

This paper examines portfolio optimization for commodity exchange-traded funds (ETFs) under heavy-tailed return behavior. Using daily Bloomberg data for 30 U.S.-listed commodity ETFs from 12 December 2018 to 16 December 2024, we study funds spanning agriculture, energy, metals, and broad commodity index exposure. We compare a passive buy-and-hold portfolio with rolling-window optimized portfolios formed under mean--variance and conditional value-at-risk (CVaR) criteria, considering both long-only and restricted long--short strategies. The results showed substantial heterogeneity across commodity sectors, with energy and broad commodity index funds displaying pronounced volatility, skewness, and excess kurtosis. Historical optimization indicated that minimum-risk and CVaR-based portfolios provided more stable cumulative performance than tangent portfolios and generally improved Sharpe, Calmar, and STARR$_{0.95}$ ratios. Extreme-value diagnostics showed that optimized portfolios remained exposed to heavy downside tails, so improved risk-adjusted performance did not eliminate extreme-loss risk. A dynamic extension based on ARMA--GARCH marginal models, Student--$t$ copula dependence, and one-step-ahead predictive scenarios improved performance mainly when combined with minimum-risk or CVaR-based objectives. Dynamic mean--variance tangent portfolios performed less reliably, reflecting sensitivity to expected-return estimation error. Transaction-cost robustness checks further showed that the practical value of dynamic optimization depended on turnover control, with low-turnover dynamic CVaR tangent portfolios remaining more resilient to implementation costs. Overall, the analysis showed that commodity ETF allocation benefited most from conservative and downside-risk-aware optimization, while optimized portfolios continued to require explicit tail-risk and implementation diagnostics.