Commodity ETFs are easy ways to invest in raw materials.
Raw materials are a crucial part of the supply chain for every company and a key part of the global economy. Particularly after the coronavirus pandemic disrupted supply chains and put some real-world development on hold, commodities are very much in demand for investors as many firms look to scale up operations and get back to business as usual now that the economy is fighting to return to normal. At the same time, some are concerned that government spending trends and other macroeconomic factors could spark rising inflation — and when prices are generally rising, raw materials like metal, energy and agricultural goods naturally become more valuable as a result. In this kind of environment, the stage is set for commodities to shine in 2021. How do small-time investors get exposure to these materials? These eight exchange-traded funds provide a way.
Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (ticker: PDBC)
The most popular pure-play commodity ETF out there, PDBC is exemplary of how complex it can be to tap into exchange-traded products in this asset class. The good news is its popularity comes from how it addresses these unique challenges. To begin with, it is actively managed and not set to a fixed index. That gives investors a level of diversification other similar funds don’t offer, with direct holdings in commodities like crude oil, corn and copper, as well as swaps in related commodity strategies. Also, the “No K-1” in its name speaks to the fact that PDBC doesn’t offer the more burdensome K-1 tax form that is issued by partnerships that include commodity firms and even some commodity fund sponsors. The result is a one-stop commodity fund to play more than a dozen of the most widely traded materials and products on earth. PDBC commands more than $5 billion in assets and is up nearly 30% year to date in 2021.
First Trust Global Tactical Commodity Strategy Fund (FTGC)
This First Trust fund is another actively managed ETF that seeks to provide investors with commodity exposure. Right now, FTGC commands about $1.2 billion in assets. Top holdings include gold and silver futures — but the list of materials and commodities in this fund also includes corn, platinum, copper, coffee, soybeans and even live cattle. While performance hasn’t been quite as impressive as the prior Invesco commodity fund, FTGC is still up more than 20% so far this year. That’s thanks to its very broad exposure to materials, metals and agricultural commodities that have seen rising prices lately.
iShares GSCI Commodity Dynamic Roll Strategy ETF (COMT)
Another diversified commodity ETF that may be attractive to investors who are concerned about inflation is this iShares fund that uses a “dynamic roll” strategy. While it’s similar to the prior funds in that it offers access to commodities across energy, metals, agriculture and livestock, it uses strategy to minimize the expenses that can come from futures investing. Most commodity funds don’t own actual metal or fossil fuels but instead invest in futures on those products tied to specific contract months. In this model, when they “roll” short-term contracts into longer-term contracts, the difference in price is the profit (or loss) that’s generated. COMT seeks out the maximum profit opportunity when it rolls instead of simply looking for the next liquid month on the calendar. It’s a subtle but important difference, which puts this $700 million commodity ETF up about 25% this year to rank among the better performers on this list.
United States 12 Month Oil Fund (USL)
If a bias toward energy commodities is actually a draw for you instead of a deterrent, consider this fund that targets only oil. Sure, there’s more risk here, but there’s a reason crude oil futures are among the most liquid commodity contracts on the planet as oil is pretty much directly linked to economic activity, even in an age of sustainability and energy efficiency. For investors looking for an exchange-traded way to get direct access to this energy commodity instead of playing indirectly though oil stocks like Exxon Mobil Corp. (XOM), USL is the way to go. Just be aware this fund is benchmarked to futures contracts that expire in each of the next 12 consecutive months, so the day-to-day moves in oil price per barrel may not be the same as the performance of USL.
Teucrium Corn Fund (CORN)
Though the smallest fund on this list with about $225 million in assets, CORN is one of the few ways for small-time investors to get direct exposure to agricultural commodity markets. Corn is not just a foodstuff, however, as it is used throughout the global economy as feed for livestock, fuel in ethanol, an industrial “chemical” used to create starches and sweeteners, and increasingly a source for plant-based plastics for companies looking to build more sustainable operations. If you want a single commodity that represents economic activity across producers, consumers and merchants, corn is one of the few materials that fits the bill. CORN is one of the simplest ways to tap into that potential — and with shares up more than 40% year to date, now may be the perfect time to give this commodity investment a closer look. One thing to note, the fund’s expense ratio is a bit high at 1.11%, or $111 for every $10,000 invested.
SPDR Gold Trust (GLD)
Gold is a popular asset among investors of all kinds. Whether you see the precious metal as a store of value in tough times and a hedge against inflation or whether you’re simply playing the short-term ups and downs in the gold market, you don’t have to look far on the internet or cable TV to see advertisements about where you can buy bullion or gold coins. GLD is among the most popular ways to play this precious metal, with $60 billion in assets at present. Part of its popularity comes from the fact that you don’t need a safe or insurance if you invest via this commodity ETF compared with owning physical bullion. Just be aware that so far in 2021, gold has underperformed many other commodities and is actually negative since Jan. 1.
iShares Silver Trust (SLV)
Very similar in structure to GLD is this iShares fund that holds physical silver instead of gold. While both gold and silver are precious metals, there is a big difference in how these commodities perform — which is most evident in the fact that SLV is actually up by almost 5% year to date as gold has declined. That’s in part because silver has more common uses in industrial and commercial applications, and it can have a tie to general economic activity and the global recovery from the pandemic. Besides, while it’s possible to invest $10,000 in gold bullion — the equivalent of less than 6 ounces — investing $10,000 in silver means 20 to 25 pounds of coins to lug around. If you are investing with any sizable amount of cash, a vehicle like SLV makes exposure much more practical.
Invesco DB Base Metals Fund (DBB)
A mix of some of the most commonly used metals, the roughly $400 million DBB fund holds commodity futures backed by copper, aluminum and zinc. Collectively, these goods are used across a wide variety of applications from copper wires and pipes in houses, aluminum cans and automobile engines, and zinc used to make the alloy of brass in zippers and musical instruments. As you can imagine, these metals tend to go up and down with broad industrial trends seeing as they have so many uses. That means if you generally feel good about “cyclical” elements of the global economy like manufacturing, DBB is a great way to get in on the ground floor of these businesses via raw materials. And judging on this commodity ETF’s gains of about 21% so far in 2021, investors who have used this approach to ride the pandemic recovery have done quite well lately.
Eight commodity ETFs to buy now:
— Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC)
— First Trust Global Tactical Commodity Strategy Fund (FTGC)
— iShares GSCI Commodity Dynamic Roll Strategy ETF (COMT)
— United States 12 Month Oil Fund (USL)
— Teucrium Corn Fund (CORN)
— SPDR Gold Trust (GLD)
— iShares Silver Trust (SLV)
— Invesco DB Base Metals Fund (DBB)
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Update 05/12/21: This article was published previously and has been updated with new information.