A rule of thumb when it comes to portfolio balancing is that commodities should make up about 5% of an investor’s total holdings because they behave differently than other types of investments, offering diversification and inflation hedging.
There are different ways to invest in commodities, from futures to streaming and royalty companies, to stocks of producers such as oil and gas firms or miners.
But commodities investments are often risky because of the volatility of the underlying raw materials that derivatives contracts are based on or that drive revenues of producers. Demand for raw materials ebbs and flows with economic cycles, and commodities often perform well at the beginning of boom cycles but then perform poorly in times of slowing economic growth or recession.
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To help counter this, investors can turn to commodities exchange-traded funds, or ETFs, to gain single-ticker diversification among types of commodities or holdings of multiple production companies to minimize risk.
In addition to funds of producers, there are also funds that offer physical or futures-based commodities exposure.
Commodities ETFs tend to be expensive and over the long term merely keep up with inflation, says Morningstar ETF analyst Daniel Sotiroff.
Still, these investment vehicles can do well during specific times of rising commodities prices, which can make them good inflation hedges.
If you’re thinking about delving into futures-based funds, you may want to consider that these can be best reserved for shorter-term speculation rather than a buy-and-hold strategy.
Some futures-based funds use short-dated contracts and track the underlying commodity price fairly closely. But longer-dated contracts can move for different reasons than the spot price of the underlying commodity. There’s also the issue of having to roll over contracts that can eat away at long-term returns.
For those considering bumping up their commodities holdings, take a look at these eight commodities ETFs:
| Commodity ETF | Expense ratio |
| Abrdn Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF (ticker: BCD) | 0.29% |
| SPDR Gold Shares (GLD) | 0.40% |
| VanEck Gold Miners ETF (GDX) | 0.51% |
| United States Copper Index Fund LP (CPER) | 0.88% |
| Global X Copper Miners ETF (COPX) | 0.65% |
| Global X Uranium ETF (URA) | 0.69% |
| United States Oil Fund LP (USO) | 0.81% |
| Teucrium Soybean Fund (SOYB) | 1.16% |
Abrdn Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF (BCD)
This diversified commodities ETF tracks the Bloomberg Commodity Index, which includes exchange-traded contracts linked to physical commodities including corn, gold, oil, wheat, copper, sugar and hogs.
With a 0.29% net expense ratio, it’s a relatively inexpensive fund as far as commodities ETFs go.
One drawback to a broadly diversified fund is that some holdings might perform well, but the overall performance of the fund can be held back by underperforming commodities.
SPDR Gold Shares (GLD)
For those who want to take advantage of gold as an inflation hedge and safe-haven investment but who don’t want to invest in futures directly or in a fund that buys futures contracts, SPDR Gold Shares could be a good choice.
The fund holds deposits of physical bullion in vaults, with each share of GLD representing a claim to a fraction. That means when you buy shares, you own physical gold without having to pay to store and insure it yourself. GLD has a 0.4% expense ratio.
Sotiroff says GLD’s physical approach is better than having exposure to futures, but there can still be some slippage between the spot price of gold and movements of the fund because the fund has to pay for gold storage and transportation.
VanEck Gold Miners ETF (GDX)
There is an advantage in holding stocks of companies instead of underlying commodities, says Sotiroff. Companies can grow and become more inherently valuable over time, while commodities simply rise and fall based on economic cycles.
“Miners ETFs offer exposure to a basket of companies involved in the supply chain, potentially mitigating the operational risks of any one company,” says Rohan Reddy, director of research with Global X, which runs the Global X Gold Explorers ETF (GOEX). “Unlike investing directly in physical commodities, miners can expand production as profit margins grow.”
Gold miners’ stocks can outperform the price of gold as the metal rises in value because operating and financial leverage lead to a higher percentage of increased free cash flow.
The VanEck Gold Miners ETF contains the biggest publicly traded gold miners in the world, as it tracks the NYSE Arca Gold Miners Index, a barometer of the overall performance of gold mining companies.
The fund has an expense ratio of 0.51%.
United States Copper Index Fund LP (CPER)
Copper is a classic example of a commodity with a price that’s dependent on the economy and economic expectations.
Because the metal is widely used for wires and pipes in industry and housing, it is sometimes referred to as Dr. Copper, as if it had an advanced degree in economics.
“Copper is a workhorse metal in the global economy, given its high ductility, conductivity and corrosion-resistant properties,” Reddy says. “Today, clean energy initiatives are catalysts that could lead to higher secular demand.”
The United States Copper Index Fund reflects the performance of the investment returns from a portfolio of copper futures contracts traded in New York.
With a 0.88% expense ratio, CPER is on the expensive side, so be sure to bake that into your risk-reward calculations.
Global X Copper Miners ETF (COPX)
Copper is one of the most affordable conductors out there, which makes it a crucial metal for renewable power grid and electric vehicle infrastructure, not to mention EVs themselves.
“Another major demand factor is the possibility of a quicker-than-expected economic recovery in China, driven by the recovery in its influential property sector,” Reddy says. “Demand is only one side of the story, though, as production disruptions in key South and Central American regions add to concerns that the copper market may be heading into a deficit.”
Keep in mind that copper is volatile and faces the risk that the U.S. might enter a recession as part of an expected broader global slowdown.
Tracking the Solactive Global Copper Miners Total Return Index, the Global X Copper Miners ETF is a targeted play on copper mining and contains the biggest names in the business. It has an expense ratio of 0.65%.
Global X Uranium ETF (URA)
Like copper, uranium will be a key material for decarbonizing the power sector. While nuclear waste is clearly a detriment, the ability of nuclear power to provide reliable, carbon-free electricity to the grid for years can’t be ignored.
“The need to decarbonize the global economy, find a reliable energy supply and meet rising energy demand has an interest in nuclear power surging,” Reddy says. “With the energy produced by nuclear fission hundreds of times greater than that produced by burning the same quantity of fossil fuels, and considerably cleaner, nuclear power is an increasingly important part of the world’s energy mix.”
Tracking the Solactive Global Uranium & Nuclear Components Total Return Index, the Global X Uranium ETF invests in companies involved in uranium mining and the production of nuclear components.
It has an expense ratio of 0.69%.
United States Oil Fund LP (USO)
As the world’s most widely traded commodity, no commodities ETF list would be complete without an oil fund. The United States Oil Fund tracks the performance of near-month West Texas Intermediate crude oil futures contracts.
Keep in mind that oil futures are volatile, and like copper, their trajectory depends on where traders think the economy is going as much as on actual economic performance. A recession would dampen demand for oil and remains a downside risk for this fund.
USO charges a 0.81% expense ratio.
Teucrium Soybean Fund (SOYB)
Soybeans are a globally traded commodity, with China by far being the biggest consumer. The U.S. and Brazil are the world’s largest producers.
The beans are used to make soybean oil and meat substitutes for human consumption. But they also form an important part of livestock diets on industrial farms.
Whether choosing Teucrium Soybean or direct investment in futures, soybean investors will also want to pay attention to the supply dynamics, including how much acreage is planted and how growth and harvests progress.
SOYB packages a portfolio of futures contracts into ETF form, making it easy for investors to buy and sell without opening a margin account. The fund is relatively pricey, with a 1.16% expense ratio.
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8 Best Commodity ETFs for Diversification originally appeared on usnews.com
Update 04/12/23: This story was published at an earlier date and has been updated with new information.
