The commodity markets are a funny place, and, historically, they haven't done much for investors. For instance, according to Wharton professor Jeremy Siegel, $1 invested in gold in 1802 would have been worth $1.39 in 2003, while $1 invested in stocks would be worth $597,485 during the same period.

Because the commodity markets move somewhat independently from stocks and bonds, commodities have traditionally been implemented in portfolios as a hedge against volatility and inflation. Even then, the recommended portfolio allocation for commodities was tiny, anywhere from 1%-5% of holdings.

That strategy has been challenged in a recent study done by Ibbotson that recommended investors dedicate anywhere from 9% to 28% of their portfolios to the commodity markets.

Macroeconomic factors
Emerging economies like China and India have an increasing demand for materials needed to fuel growth. For instance, according to a recent issue of The Economist, "India currently consumes only one-eighth as much copper and one-third as much energy per person as does China. ... India needs to expand its manufacturing to create more jobs, and to improve its dreadful infrastructure."

Indeed, with a population expected to surpass China sometime in the next century, a growing Indian economy could increase demand for commodities well into the future.

Missing the boat
Some investors are concerned that the emerging markets' pressure on commodity prices is already priced into valuations, but consider the same Economist report that noted that commodity prices "in real terms are less than half of what they were in the mid-19th century." Sure, the world economy is more service-oriented and improved technologies have increased commodity supplies since that time, but at least from a historical perspective, current prices have a lot of room to grow.

If you're interested in adding some commodities to your portfolio, but are afraid of futures contracts or understanding the intricacies of the chemical, paper, and steel industries, then take a look at an exchange-traded fund that follows commodity companies. One of these ETFs is the Vanguard Materials ETF (AMEX:VAW).

Top holdings of Vanguard Materials ETF include:

Fund Weight

DuPont (NYSE:DD)


Dow Chemical (NYSE:DOW)


Monsanto (NYSE:MON)


Alcoa (NYSE:AA)


Newmont Mining (NYSE:NEM)


Praxair (NYSE:PX)


Phelps Dodge (NYSE:PD)






International Paper


Source: Vanguard

Hot topic
The future of commodity prices is a popular topic among investors participating in Motley Fool CAPS, our new community stock-picking database. According to CAPS, the materials sector has returned 16.5% over the past year, just ahead of the S&P 500's 14% return over the same period.

Do you think this trend will continue? Click here to vote whether or not you think the Vanguard Materials ETF will continue to outperform the S&P 500. Afterwards, take a look at what other investors are saying about the commodity markets or even about your favorite stock.

Go here for the complete list of ETF contenders in our CAPS tournament. And for more information on exchange-traded funds, visit the Fool's ETF Center .

Todd Wenning does not own shares of any company mentioned in this article, but he has rated the Vanguard Materials ETF an "outperform" in CAPS. Dow is a Motley Fool Income Investor choice. The Fool is investors writing for investors.