Commodities ETFs: The Complete Guide for Investors

Commodities ETFs: The Complete Guide for Investors

Here’s what you need to know about investing in commodities ETFs.

ETF
|
Reviewed by: etf.com Staff
,
Edited by: Ron Day

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:

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. 

The etf.com ETF Report Research Paper is an authoritative analysis of hot-button issues and topics facing the ETF industry. Our highly trained analysts go beyond explainers by delving into the intricacies, research and data, exploring emerging trends and showcasing research findings. The reports showcase proprietary data and analysis from industry experts and become a valuable resource for industry professionals, policymakers and researchers. ETF Report Research Papers are also widely recognized as an effective tool for knowledge sharing and decision-making processes. The papers help companies establish thought leadership and credibility within our industry, as well as drive lead generation and business development.