Best Commodity ETFs for Inflation

Commodity ETFs that offer broad market exposure across multiple commodities have historically performed consistently better during inflationary periods than single commodity funds, such as gold ETFs.  

We take a fresh look at inflation in 2023, as well as the top commodities ETFs for inflation. 

What Is a Commodity ETF? 

A commodity ETF is a type of exchange-traded fund that provides exposure to commodities, which are raw materials or primary agricultural products that can be bought and sold. These ETFs allow investors to gain exposure to the price movements of commodities without having to own the physical assets themselves.  

Commodity ETFs can track the price of individual commodities or a basket of commodities, offering diversification and potentially serving as a hedge against inflation or currency fluctuations. ETFs may track the price of commodities, such as oil, gold, silver or agricultural products, by holding the physical commodities directly.  

Alternatively, these ETFs may track a commodity benchmark asset’s price indirectly by using derivatives, such as futures or options contracts. Some commodity ETFs are equity-based, which means they invest in companies involved in natural resources or the mining industry. 

There are 96 commodities ETFs traded on the U.S. markets with total assets under management of $128.88 billion. The average expense ratio is 0.76%. The largest commodity ETF is the SPDR Gold Trust (GLD), with AUM of $54.32 billion.  

Do Commodity ETFs Hedge Against Inflation? 

Commodity ETFs are often considered by some investors as a potential hedge against inflation, but the effectiveness of this hedge can vary depending on several factors. While commodities have historically exhibited a positive correlation with inflation, there are nuances to consider. 

Here's what to know about commodity ETFs and inflation: 

• Historical inflation hedge: Inflation is characterized by a general rise in prices for goods and services over time. Commodity prices, such as those of energy, metals and agricultural products, often rise during periods of inflation. For example, in the most recent two-year period where inflation was rising dramatically, broad basket commodity ETFs rose in price more than 60%. 
• Supply and demand dynamics: Commodities are subject to supply and demand forces that can influence their prices. During times of high inflation, demand for commodities might increase and lead to higher production costs, increased infrastructure spending and other factors, potentially leading to higher prices. 
• Different commodities: Not all commodities respond equally to inflation. Some commodities, such as agricultural products, might be more directly influenced by inflation, while others, like precious metals, can also be affected by factors like currency movements, safe-haven demand and central bank policies. 
• Timing and duration: The effectiveness of commodity ETFs as an inflation hedge can depend on the timing and duration of inflationary periods. If inflation is short-lived or commodity prices are influenced by other factors, the correlation may not hold as expected. 
• Risks and volatility: Commodity markets can be highly volatile, and investing in commodity ETFs comes with its own set of risks. Price volatility, changes in market sentiment and external factors can impact the performance of these ETFs. 

Inflation in 2023 

There are a number of factors that led to inflation in 2023, including: 

• The COVID-19 pandemic: The COVID-19 pandemic caused a number of disruptions to the global economy, including supply chain disruptions and labor shortages. These disruptions led to higher prices for goods and services. 
• The war in Ukraine: The war in Ukraine has also disrupted global supply chains and led to higher prices for commodities, such as oil and wheat. 
• Government stimulus: Governments around the world implemented stimulus packages to support their economies during the COVID-19 pandemic. These stimulus packages included increased spending, which put more money in the hands of consumers and businesses, which can lead to higher prices. 
• Increased demand: Demand for goods and services has also increased in 2023, as economies reopened, and people resumed their normal activities. This increased demand put upward pressure on prices. 

Is Stagflation a Looming Threat? 

There is no consensus among economists on whether stagflation is a looming threat. Some economists believe that the current economic conditions are not conducive to stagflation, while others believe that the risk of stagflation is increasing. Stagflation is a situation in which the economy is experiencing both high inflation and slow economic growth. 

Stagflation can be a difficult situation to deal with, as it can lead to a number of negative consequences, such as rising unemployment, falling wages and a decline in living standards.  

How to Hedge Against Stagflation 

A diversified investment portfolio can help mitigate the impact of stagflation. A mix of asset classes, including stocks, bonds, commodities and alternative investments, may provide better protection against various economic scenarios. Investments that can help to hedge against stagflation include Treasury inflation-protected securities (TIPS), commodities and real estate. 

Other investments that tend to perform relatively well during periods of stagflation include dividend-paying stocks, cash and short-term bonds, and defensive sectors, such as utilities, healthcare and consumer staples. 

Best Commodity ETFs for Inflation and Diversification 

Broad market commodities ETFs tend to produce a combination of diversified exposure to commodities and strong relative performance during inflationary periods, while single commodity investments, such as gold and other precious metals, have mixed results as inflation hedges. For example, for the three years ending August 18, 2023, many broad market commodity ETFs annualized over 20%, whereas GLD returned an average of -2.33%. 

3 Best Commodity ETFs for Inflation: Broad Market

Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF 

The Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC) is an actively managed fund that holds a diverse basket of commodity futures and aims to mitigate negative roll yield in its contract selection. Its open-ended structure and use of an offshore subsidiary to gain commodity exposure enables it to avoid K-1s, which are tax forms related to partnerships. PDBC’s expense ratio is 0.59% and its AUM is $5.11 billion. 

First Trust Global Tactical Commodity Strategy Fund 

The First Trust Global Tactical Commodity Strategy Fund (FTGC) is an actively managed fund that doesn't directly own futures contracts, but gains exposure to commodities through its holdings in a Cayman Islands-based subsidiary that holds futures contracts. The fund can also short futures, hold commodities ETFs and structured products tied to commodities. FTGC’s structure means that it's taxed like other equity funds and does not distribute K-1 forms to investors. FTGC’s expense ratio is 0.95% and its AUM is $2.69 billion. 

Invesco DB Commodity Index Tracking Fund 

The Invesco DB Commodity Index Tracking Fund (DBC) tracks an index of 14 commodities. It uses futures contracts to maintain exposure and selects them based on the shape of the futures curve to minimize contango, which occurs when the futures price is above the expected future spot price. The fund's commodities exposure is focused within the areas of energy, precious metals, industrial metals and agriculture sectors. DBC’s expense ratio is 0.87% and its AUM is $2.05 billion. 

Bottom Line on Best Commodity ETFs for Inflation 

While commodities ETFs can potentially serve as a hedge against inflation, they are not a guaranteed solution and come with their own set of risks. Historically, broad market commodities ETFs have been better inflation hedges than funds that invest in a single commodity, such as gold. Before investing in a commodity fund, investors should carefully consider their investment goals, risk tolerance and overall portfolio strategy.