When you invest in commodities, you invest in raw materials, such as those that are consumed directly, like vegetables or coffee, or those that are used to produce other goods and services.
This could include natural gas used for residential heating or lumber used to build homes and furniture. There are a number of ways you can begin investing in commodities, ranging from the direct purchase of the commodities to investing in a futures contract that hedges on the commodity’s potential to be worth more than when the contract is signed.
However, for most non-professional investors, the best and most practical way to invest in commodities is through a commodity-specific ETF.
Quick look: the best commodity ETFs
- Invesco DB Commodity Tracking Fund
- iShares S&P GSCI Commodity-Indexed Trust
- First Trust Global Tactical Commodity Strategy ETF
- iPath Pure Beta Broad Commodity ETN
- iPath Bloomberg Commodity Index Total Return ETN
- Invesco Optimum Yield Diversified Commodity Strategy No K-1 Portfolio
- What individual commodities can you invest in?
- Qualities of a great ETF
- The Best Commodity ETFs You Can Buy
- 1. Invesco DB Commodity Tracking Fund
- 2. iShares S&P GSCI Commodity-Indexed Trust
- 3. First Trust Global Tactical Commodity Strategy ETF
- 4. iPath Pure Beta Broad Commodity ETN
- 5. iPath Bloomberg Commodity Index Total Return ETN
- 6. Invesco Optimum Yield Diversified Commodity Strategy No K-1 Portfolio
- Final thoughts
What individual commodities can you invest in?
If you can name a commodity, you can probably invest in it. Some of the most common commodity investments include:
- Precious metals. Precious metals are used in a host of products, ranging from gold jewelry to the copper wiring in your home. Silver, platinum, gold, and copper are some of the most common commodities today.
- Agricultural products. From the cotton in your T-shirt to the cocoa in your favorite chocolate bar, raw agricultural products make the world go ‘round. Some other common agricultural products included in commodity ETFs are sugar, coffee, soybeans, corn, wheat and rice.
- Energy. Some of the most-consumed commodities on Earth are those that are used to create energy. Natural gas, crude oil, and coal are considered to be some of the most valuable commodities in the world due to an almost universal demand.
- Livestock. Common livestock commodity ETFs include both specific cuts of meat, like steaks or pork belly, as well as live cattle. The livestock category also includes accessories needed to raise cattle and poultry, including feed and herding tools.
Qualities of a great ETF
A high number of assets
ETFs with a solid number of assets are more reliable than those with a smaller amount. A high number of assets means that many investors have already gotten in on the action, while a lower number means that the fund does not have many investors.
As a general rule, you should search for ETFs that have more than $10 million in assets—if you go lower than this, it may indicate that the fund has difficulty securing investors, which may make it difficult for you to sell your shares when it comes time to retire.
Liquidity is a measure of how easy it is to buy and sell something. ETFs with high liquidity can be bought and sold with ease, while those with low liquidity do not change hands very often.
When it comes to funds, you can measure how liquid an asset is by looking at its 24-hour trading volume relative to other funds in its category—high daily trading volume will make it easier to buy and sell shares, which can be especially important if you are a high-level trader.
Unlike mutual funds, ETFs are passively managed. You can expect fees to be significantly lower when compared to mutual fund counterparts.
When you search for the right ETF, look for options with an expense ratio of less than 1% if possible. Even a small increase in fees can severely cut into your profits over time.
The Best Commodity ETFs You Can Buy
1. Invesco DB Commodity Tracking Fund
The Invesco DB Commodity Tracking Fund seeks to mimic the performance of the DBIQ Optimum Yield Diversified Commodity Index Excess Return, a rules-based index composed of 14 of the world’s most frequently traded commodities.
Some of the highest-weighted commodities within the index are crude oil, corn, gasoline, and copper ore. In addition to commodities themselves, the fund also holds about 20% of its total assets in cash and 30% in collateral bonds. The Invesco DB Commodity Tracking Fund is very liquid, with about 2.3 million shares changing hands daily.
This can help mitigate the volatile nature of commodity trading. With over $3.18 billion in assets, an index tracking some of the most popularly-traded commodities and an average expense ratio of 0.89%, the Invesco DB Commodity Tracking Fund is a great “starter ETF” for those getting started in commodity investing.
Invesco DB Commodity Tracking Fund returns
2. iShares S&P GSCI Commodity-Indexed Trust
The iShares S&P GSCI Commodity-Indexed Trust uses futures contracts to invest in a production-weighted mix of commodities.
The fund is heavily weighted toward commodities in the energy sector, including crude oil and gasoline. Small allocations are made to invest in other commodities like precious metals and aluminum, along with investments in the agricultural industry.
Because the fund invests solely in futures contracts, this ETF may be more likely to show volatility. However, with an expense ratio of 0.80% and a massive $1.24 billion in assets, the iShares S&P GSCI Commodity-Indexed Trust is a liquid option that covers a breath of some of the most dependable commodities on the market.
3. First Trust Global Tactical Commodity Strategy ETF
The First Trust Global Tactical Commodity Strategy ETF differs from most other funds on this list because it is one of the only actively-managed commodity ETFs. This means that its expense ratio is a bit high (0.95%) but the fund also has a high liquidity rating and over $200 million in held assets.
The FTGC Strategy ETF gains its commodity exposure through subsidiaries in the Cayman Islands—highly weighted commodities in the fund include soybeans, live cattle, and cocoa beans. The fund is classified as an open-ended fund and holds a total of about 30 commodities through futures contracts and structured commodities products.
With a unique and sustainable structure, long-term investors may find the higher expense ratio tolerable thanks to the active management.
4. iPath Pure Beta Broad Commodity ETN
The iPath Pure Beta Broad Commodity ETN tracks the Barclay Commodities Index, which places greater weight on liquid commodities. As a result, the iPath PBBC is considerably liquid for its size, holding just $55.56 million in assets yet moving over $69,000 worth of shares on a daily basis.
This also means that the fund does not showcase the high crude oil holdings that most other commodities funds focus on; the iPath PBBC currently holds oil contracts and gold in almost equal percentages.
A solid choice for investors who are looking to move away from commodities funds heavily weighted towards the energy sector, the iPath Pure Beta Broad Commodity ETN offers investors high liquidity and a lower-than-average expense ratio of 0.70%.
5. iPath Bloomberg Commodity Index Total Return ETN
The iPath Bloomberg Commodity Index Total Return ETN is a commodities ETF that places equal weight between dollar-amount production and liquidity to balance its percentage holdings.
The fund attempts to take the following four principles into consideration when creating the portfolio: economic significance, diversification, liquidity, and market reliability. The end result is a well-diversified find that holds a 35% stake in agricultural products, 22% in the energy sector, 19% in precious metals, and 18% in industrial metals and products.
The fund holds over $861 million in assets and seeing an average daily trading volume of $7 million. The fund’s expense ratio is 0.75%, which is lower than most other options, and the fund offers a wide and equally weighted exposure to the commodities market.
You’ll like this fund if you have an eye towards sustainability; it has a minimized emphasis on non-renewable resources.
6. Invesco Optimum Yield Diversified Commodity Strategy No K-1 Portfolio
The Invesco Optimum Yield Diversified Commodity Strategy No K-1 Portfolio has an exceptionally low expense ratio of 0.61%, unique for an actively managed fund.
The fund seeks to outperform the DBIQ Opt Yield Diversified Comm Index ER, an index that tracks the performance of futures contracts of 14 of the world’s most commonly-traded commodities.
The fund’s major holdings are in futures contracts related to crude oil, gasoline, gold, wheat, and corn providers. A well-diversified fund that limits volatility, the Invesco Optimum Yield Diversified Commodity Strategy No K-1 Portfolio offers a great introduction to the commodities sector while also maintaining lower fees for less prominent investors.
Invesco Optimum Yield Diversified Commodity Strategy No K-1 Portfolio performance
Despite the fact that commodity ETFs first appeared on the market in 2003, the sector is still learning how to handle a large amount of volatility that comes along with liquid investments.
Smart investors can protect themselves and their savings by complementing niche commodity ETFs with a well-rounded total market index fund.