Invest in these commodity ETFs for a potential respite from high inflation.
May’s consumer price index report from the U.S. Labor Department showed headline inflation numbers for April 2022 coming in at an 8.3% year-over-year increase. While down a touch from 8.5% in March, the numbers were still higher than what economists and markets forecast. Driving the figure was a significant increase in the price of gasoline and foodstuffs for consumers. With continued conflict in Ukraine and strained global supply chains, many are forecasting inflation to remain elevated for the time being. Investors looking for inflation protection can buy physically backed or futures-based commodity exchange-traded funds, or ETFs, that track the price of goods like precious metals, livestock, oil, natural gas and grains. During times of inflation, these ETFs can outperform as prices of their underlying commodities increase. Here are eight of the best commodity ETFs to buy today.
Invesco DB Commodity Index Tracking Fund (ticker: DBC)
First among the best commodity ETFs to buy today is DBC, which tracks a diversified basket of commodities. Because some of these commodities would be prohibitively expensive to store over long periods of time, DBC gains its exposure using futures contracts. These are derivatives that allow the buyer to lock in a predetermined price to buy a commodity at a given time in the future. Over half the ETF tracks the prices of various fuels like New York Harbor ULSD, gasoline, Brent crude oil and West Texas Intermediate crude, with the remaining funds spread out among aluminum, copper, natural gas, gold, wheat, corn, soybeans, zinc, sugar and silver. DBC is highly volatile, and generally recommended for advanced investors with a high risk tolerance. The ETF is also somewhat expensive with a high expense ratio of 0.87%.
Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC)
An alternative to DBC is PDBC. PDBC follows the same index as DBC does, but with one notable exception. Because DBC is structured as a commodity pool, investors must file a K-1 tax form come tax reporting season, which can take significant time and become a headache. PDBC avoids this by investing in commodities through a subsidiary, which allows the ETF to be structured as an open-ended fund. This eliminates the need for a K-1 tax form. Another important distinction to note is that PDBC will have higher distributions in the form of capital gains returns, whereas DBC will retain and reinvest those automatically. This has no implications on total returns but may not be efficient in a non-tax-advantaged account. Finally, PDBC has a lower expense ratio, coming in at just 0.62%.
Teucrium Wheat Fund (WEAT)
Top commodities ETF WEAT offers pure-play exposure to wheat futures contracts using a laddered strategy to reduce the effect of contango. Contango occurs when the price of futures contracts is above the spot price of the underlying commodity, causing funds to lose money as they sell contracts about to expire for cheap, while having to purchase later-expiring contracts for higher. WEAT mitigates this risk by spreading futures contracts across multiple maturities instead of buying just front-month futures. The ETF is up 58% year to date through May 13, following a massive rally on the heels of the initial Russian invasion of Ukraine, one of the world’s largest producers and exporters of wheat. Holding WEAT will cost an expense ratio of 0.87%.
SPDR Gold Shares (GLD)
As a “hard” commodity with tangible value and use cases in technology, manufacturing and jewelry, gold often skyrockets during times of economic stress and global sociopolitical instability. While investors can buy and hold physical bullion, doing so incurs storage and insurance costs. A better way of holding gold in an investment portfolio is by buying a physically backed gold ETF like GLD. Unlike DBC and PDBC, GLD does not use futures to track the price of gold. The ETF holds corresponding deposits of bullion in secure vaults, with each share of GLD representing a claim to a fraction. GLD is also highly liquid, with good volume traded daily and a strong options chain for investors looking to gain additional exposure or hedge their portfolio. The ETF costs an expense ratio of 0.4% to hold.
SPDR Gold MiniShares (GLDM)
Investors not interested in trading gold options can eschew GLD and settle for its less-expensive, newer cousin, GLDM. Compared to GLD, GLDM has lower volume traded, less assets under management, or AUM, and no options chain at this time. However, the ETF offers a much lower price per share and a far lower expense ratio at just 0.1%. This makes GLDM a superior option for passive investors looking to gain exposure to gold in their investment portfolio. GLDM tracks the same physical deposits of gold bullion as GLD does, which allows its share price to accurately track the spot price of gold. As a long-term, low-cost holding, GLDM is one of the cheapest physical gold ETFs on the market right now.
Teucrium Corn Fund (CORN)
Corn is one of the most important agricultural commodities on the market, with applications worldwide as animal feed and biofuel. Processed varieties of corn also play an important role in the production of foodstuffs for human consumption, notably in starches and sweeteners. When geopolitical crises and recessions occur, the price of staples like corn tend to skyrocket thanks to renewed demand and hoarding. Investors keen on gaining exposure to corn in their portfolio can buy the CORN ETF. Like WEAT, CORN uses futures contracts spread out among a variety of expiry dates to track the price of corn while minimizing the effects of contango. However, CORN does charge a higher expense ratio than WEAT at 1.14%.
iShares Silver Trust (SLV)
Silver is an important commodity used not only in jewelry, but also a vast range of industrial applications. Its high thermal and electrical conductivity make it a sought-after component in semiconductors and other electronics. Its rarity makes it a reliable store of value like gold, giving it the ability to hedge against some economic downturns and inflationary periods. Investors looking to gain silver exposure in their portfolios without buying and storing physical bullion can buy shares of SLV. With over $11 billion in net assets, SLV is the largest physically backed silver ETF in operation, with more than 17,000 metric tons of silver held in trust via secure vaults. SLV will cost an expense ratio of 0.5%.
Teucrium Soybean ETF (SOYB)
Like corn, soybeans are also an integral component of the food chain and global economy. Soybeans are used in oil production, wood substitutes and stationery and as animal feed. As an easily farmable and sustainable source of food that is high in protein, soybean production is expected to increase steadily as populations worldwide grow. Like many commodities, the soybean market also offers a lower historical correlation to equities and bonds, which may offer portfolios a tangible diversification benefit. Investors bullish on soybeans can buy SOYB, which tracks the price of soybean futures contracts laddered to minimize the effects of contango. Like CORN and other agricultural commodity ETFs, SOYB is rather expensive, charging a high expense ratio of 1.16%.
8 of the best commodity ETFs to buy now:
— Invesco DB Commodity Index Tracking Fund (DBC)
— Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC)
— Teucrium Wheat Fund (WEAT)
— SPDR Gold Shares (GLD)
— SPDR Gold MiniShares (GLDM)
— Teucrium Corn Fund (CORN)
— iShares Silver Trust (SLV)
— Teucrium Soybean ETF (SOYB)
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8 Best Commodity ETFs to Buy Now originally appeared on usnews.com
Update 05/16/22: This story was published at an earlier date and has been updated with new information.
