Commodities ETFs: The Complete Guide for Investors

The commodities market, encompassing everything from precious metals to agricultural products, has long been a cornerstone of the global economy. Today, a new wave of investors seeks exposure to these resources through a convenient and accessible avenue: exchange-traded funds dedicated to commodities. 

This guide delves into the world of commodities ETFs, equipping you with the knowledge to navigate this dynamic investment landscape.

What Are Commodities ETFs?

Imagine a basket overflowing with precious metals, oil barrels, and bushels of wheat. Now, picture shares representing ownership of this basket, readily traded on major stock exchanges. That, in essence, is the concept behind a commodity ETF. These innovative vehicles pool investments in various commodities, allowing you to gain exposure to a broad segment of the market through a single purchase. Unlike directly buying physical commodities, which involves storage, insurance, and logistics complexities, ETFs offer a streamlined and cost-effective way to participate.

Types of Commodities ETFs

The diverse nature of the commodities market is reflected in the wide range of commodity ETFs available. Here's a breakdown of some prominent categories:

• Broad commodity ETFs: These ETFs aim to provide diversified exposure across multiple commodities sectors, such as energy, metals, and agriculture. Examples include the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC) or the First Trust Global Tactical Commodity Strategy Fund (FTGC).
• Single Commodity ETFs: If you possess a specific interest in a particular commodity, like gold or oil, numerous ETFs cater to your needs. The SPDR Gold Trust (GLD) tracks the price of gold, while the United States Oil Fund (USO) focuses on light sweet crude oil.
• Inverse and Leveraged ETFs: Designed for aggressive traders with a high-risk tolerance, these ETFs offer magnified returns (or losses). Inverse ETFs aim to profit from price declines in the underlying commodity, while leveraged ETFs amplify price movements, both upwards and downwards.

Benefits of Investing in Commodities ETFs

Commodities ETFs offer several compelling advantages for investors:

• Diversification: Owning a single commodity exposes you to its specific price fluctuations. Broad commodity ETFs, by contrast, can provide diversification across many different commodities, mitigating risk.
• Accessibility: Unlike physically buying commodities, ETFs trade on stock exchanges. You can invest through your existing brokerage account, eliminating the need for specialized storage or transportation.
• Transparency: Commodity ETFs hold underlying assets that are clearly defined and regularly valued, ensuring transparency in your investment.
• Hedging: Commodities can act as a hedge against inflation, as their prices often rise when the value of currency weakens.

Risks to Consider

While offering attractive advantages, commodities ETFs are not without risks:

• Volatility: The commodities market is inherently volatile, and ETF prices will reflect these fluctuations. Be prepared for significant price swings.
• Contango: Due to the logistical challenges of storing and managing physical commodities like oil or wheat, a significant portion of commodities ETFs are forced to rely on futures contracts. This means they don't own the underlying physical asset itself, but rather contracts that agree to buy or sell the commodity at a specific price on a future date. While this approach offers greater accessibility and liquidity, it introduces the potential drawback of contango, where the futures price is higher than the spot price, potentially leading to negative returns for the ETF.

Considerations Before You Invest

Before diving into the world of commodities ETFs, carefully consider these factors:

• Investment Goals: Clearly define your objectives. Are you seeking diversification, a hedge against inflation, or exposure to specific commodities?
• Risk Tolerance: Commodities ETFs can be volatile. Ensure your risk tolerance aligns with the potential market fluctuations.
• Research the ETF: Understand the specific commodities the ETF holds, its expense ratio, and its investment strategy.

Finding the Right Commodity ETF

etf.com has plenty of resources to help you find the right commodity ETF. Our commodities topics page currently lists 97 ETFs tied to the asset class. There you can see that GLD is currently the largest single commodity ETF, while the aforementioned PDBC is the largest broad commodities ETF, with $5.2 billion in assets under management.  

The $570 million ProShares Ultra Bloomberg Natural Gas (BOIL) is the most popular natural gas futures fund.  

Other notable funds include the $13 billion iShares Silver Trust (SLV)— the largest silver ETF—and the $750 million United States Natural Gas Fund (UNG)—the largest natural gas fund.  

Click through to individual fund pages to learn more about the ETFs mentioned here as well as the others on our list.

You can also use etf.com’s fund screener to further narrow down your search.  

The Bottom Line on Commodities ETFs

Commodities ETFs offer a compelling way to tap into the dynamic commodities market. By understanding the types available, their benefits and risks, and carefully considering your investment goals, you can make informed decisions about incorporating these instruments into your investment portfolio. Remember, like any investment, thorough research and a well-defined strategy are crucial for navigating the exciting, yet volatile, world of commodities ETFs.