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What is a commodity ETF?
A commodity ETF is an exchange-traded fund that invests in physical commodities such as agricultural products, energy sources and metals. Commodity ETFs often grow in popularity when there is global conflict or high inflation, as commodities are always needed by consumers. Other purchases — for example, luxury goods or discretionary items — may be put off during difficult times.
If you invest in a broad commodity ETF, it may include some of the following types of commodities:
Oil.
Wheat.
Gold.
Silver.
Corn.
Soybeans.
If you invest in a more focused commodity ETF, it will likely invest in just one type.
Best-performing commodity ETFs
Ticker | Name | 5-year return |
|---|---|---|
AAAU | Goldman Sachs Physical Gold ETF | 12.15% |
OUNZ | VanEck Merk Gold Trust | 12.04% |
IAUF | iShares Gold Strategy ETF | 10.97% |
BCD | abrdn Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF | 10.25% |
FTGC | First Trust Global Tactical Commodity Strategy Fund | 9.85% |
PDBC | Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF | 9.17% |
COM | Direxion Auspice Broad Commodity Strategy ETF | 8.96% |
Source: VettaFi. Data is current as of market close on May 1, 2024. Data is intended for informational purposes only.
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How to invest in commodity ETFs
Investing in commodity ETFs is fairly easy, but if you don't have a brokerage account already, you'll need to follow a few steps first.
1. Open an investment account
An investment account is simply where your investments themselves – and the money you plan to spend on them – live. Some investment accounts have significant tax benefits over others, so it's worth reading up on which type of investment account is right for you. Once you know which type of account you'd like to open, you can read our roundup of the best online brokerage accounts to find one that fits your needs.
» Check out the best brokerage accounts for mutual funds
2. Research commodity ETFs
Most online brokerage accounts will have screening tools that can help you search through commodity ETFs. When comparing ETFs, make sure you look at the following metrics to help narrow down your options:
Expense ratios
Expense ratios are annual fees that are taken as a percentage of your assets. For example, if the fund charges a 1% expense ratio, and you have $10,000 invested, you'll pay $100 in fees annually. ETFs tend to have lower expense ratios than actively managed funds, and you may be able to find commodity ETFs with expense ratios around 0.20%. Keep in mind, you'll never see expense ratios show up on monthly statements. These fees are taken out automatically, so it's important to know how much you'll lose to fees before you invest. Check out our mutual fund fee calculator to see how much a fee can cost you over time.
Volume
This shows how many shares traded hands over a given time period — it’s an indicator of how popular a particular fund is.
Holdings
Most funds will show you their top ten holdings, which means the ten companies that take up the biggest percentage of a fund.
Performance
Sure, past performance doesn’t indicate future returns, but a fund's history can be useful. Look at a fund's long-term performance, so three-year, five-year or 10-year performance instead of one-year for example, to get a sense of how it has performed historically.
3. Purchase the commodity ETF
The process for buying commodity ETFs is similar to the process for buying stocks. Navigate to the “trading” section of your brokerage’s website and search for the ETF using its name or ticker symbol and enter either how many shares you'd like to purchase or the dollar amount you'd like to purchase. Check out our guide on how to buy ETFs for more information.
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Why invest in commodity ETFs?
Commodity ETFs can help round out an investment portfolio. They offer diversification by providing exposure to additional economic sectors. That way, if one sector is performing poorly, another sector may be able to boost it. For example, if you invest in an oil commodity ETF and a clean energy ETF, you're protecting your portfolio against economic volatility. If a foreign war is making oil more expensive, clean energy may get a boost. If the price of solar panels go up, oil become more attractive to consumers. This formula doesn't always work perfectly, but it may help your investments enjoy some stability.
Pros and cons of commodity ETFs
Commodity ETF pros
Commodities can help hedge against inflation.
Commodity ETFs may help diversify your portfolio, depending on what you’ve already invested in.
Commodity ETF cons
Commodities are often at the whim of geopolitical and climate events. If you invest in a wheat ETF and there's widespread drought, for instance, your ETF may not perform well.
If you invest too much in any one particular commodity, that may cancel out its diversification benefits.
» Looking for more diversification? Check out the best ETFs
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