8 Best Commodity ETFs for Diversification | Investing

Some experts say these raw materials should make up at least some of an investment portfolio because they behave differently from stocks and bonds, providing an element of diversification.

While investors can put money into commodities through futures and options or stocks of oil and gas firms, miners or agricultural companies, one of the easiest ways is through exchange-traded funds, or ETFs.

Many offer single-ticker diversification among types of commodities or holdings of multiple production companies to minimize risk. In addition to funds of producers and futures, there are also funds that offer physical commodities exposure.

“These funds can minimize transaction costs and mitigate risks associated with individual commodity or company performance,” says Nate Palmer, president at online trading platform Moomoo Technologies Inc. “However, trading in sector or commodity-specific ETFs can lead to heightened volatility due to heavy concentration. Additionally, it is crucial to consider liquidity when investing in smaller, more niche ETFs.”

Here are some solid ETFs that offer portfolio diversification through commodity investments:

Abrdn Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF (BCD)

A key difference between commodities and stocks and bonds is that commodities themselves don’t generate cash flows like the companies that produce them.

“An allocation in commodities is a bet on price movement, which is extremely difficult to consistently get right,” says John Cunnison, chief investment officer at Baker Boyer Bank. “This doesn’t mean commodities don’t play a role in a broadly diversified portfolio, but it does mean investors should adjust their expectations for the role that commodities play.”

Commodities can act as inflation hedges and, according to Cunnison, they are particularly good at hedging against unexpected inflation. But significant surprise inflation isn’t all that common, he adds.

“So it is important to size your commodity exposure appropriately, and it is very important not to pay a lot for your exposure,” Cunnison says. “For a part of your portfolio that typically pulls its weight infrequently, the ETF expense ratio is an extremely important consideration.”

He points to BCD as a good option, with an expense ratio of 0.3%. That means you’ll pay $30 in annual fees on an investment of $10,000. Its current 4.5% yield is a bonus.

This diversified commodities ETF tracks the Bloomberg Commodity Index, which includes contracts linked to physical commodities including corn, gold, oil, wheat, copper, sugar and hogs.

iShares Commodity Curve Carry Strategy ETF (CCRV)

With a 0.4% expense ratio, CCRV is another fund Cunnison likes. It tracks an index of commodities futures that have favorable roll yields. Positive roll yield is profit that can be made in the futures market by selling shorter-term contracts and buying longer-dated ones at a cheaper price.

But that set of conditions isn’t always the case in the futures market. Futures contracts that expire farther out are often more expensive. Carrying costs such as storage and insurance, or depreciation in perishable agricultural commodities, are often responsible for this upward-sloping price curve, which tends to be the default for futures markets.

In fact, some commodities funds that are only meant for short-term trading and only hold nearby futures contracts often lose money when they roll their shorter-term contacts into more expensive longer-term ones.

So having a fund that ferrets out positive roll yield situations across a broad basket of commodities can be a valuable tool for those who want a relatively simple entry into the complicated world of futures contract arbitrage. It doesn’t hurt that it also has a 7.2% yield now.

United States Oil Fund LP (USO)

This is one of those funds that doesn’t do long-term investors any favors when farther-out futures prices are more expensive than shorter-dated ones. But it can be a good way to express your view on the short-term oil market without getting into futures trading yourself. It has an expense ratio of 0.6%.

USO tracks the performance of near-month West Texas Intermediate crude oil futures contracts, but when that contract’s expiration is scheduled within two weeks, the fund rolls its holdings into the next month’s contract.

Keep in mind that the oil market is volatile and depends on where traders think the economy is going as much as on actual economic performance.

“Energy prices are closely watched due to global supply concerns and shifts in demand,” says Avis Berg, chief investment officer at Berg Capital & Co.

iShares S&P GSCI Commodity-Indexed Trust (GSG) 

Although this ETF that provides access to energy, metals and agricultural markets has an expense ratio of 0.75%, Cunnison still thinks it’s a good option.

With funds that offer exposure to many different raw materials, investors benefit from broad rallies in commodities and get the diversification they offer against stocks and bonds, he says. The downside is that these bundles have some commodities that don’t perform as well or whose run-ups have run out.

“Be careful of attempting to pick the commodity that you think will go up next,” Cunnison says. “It’s a very difficult thing to predict, even for the professionals. If your goal is diversification and inflation protection, you will be well served by broad, low-cost exposure to commodities.”

Invesco Electric Vehicle Metals Commodity Strategy No K-1 ETF (EVMT)

This fund offers a way to get exposure to the raw materials needed for electric vehicles without buying individual mining companies.

The fund uses futures and other financial instruments to focus on the raw materials of the global electric vehicle manufacturing process, including lithium, cobalt, aluminum, nickel, iron ore and copper.

For an actively managed fund, its 0.59% expense ratio is reasonable, and its current 5.5% yield adds to its appeal.

According to Cunnison, many commodity producers underinvested in capacity expansions over the past decade for a variety of reasons.

“This has set up a situation where we will likely see demand outstrip supply during the next decade, which will put upward pressure on prices,” he says. “This is especially true of the metals and minerals used in the transition from a fossil-fuel-based economy to one that increasingly relies on electric and battery power.”

In addition to futures-backed commodity funds, there are also those that buy physical commodities and store them in vaults. Each share in these funds represents exposure to a certain amount of that commodity, but that doesn’t necessarily mean you can take direct ownership of the commodity itself.

This gold-backed fund is one of the best known of its kind and has proven to be a popular way to invest in the precious metal without the complexities of the futures market or the hassle of storing, insuring and transporting gold yourself.

“Currently, some experts anticipate continued strength in precious metals like gold, given ongoing economic uncertainties,” says Berg, adding that GLD is a well-regarded option that “gives exposure to physical gold, a popular hedge against economic volatility.”

With $56.2 billion in assets under management, GLD has an expense ratio of 0.4%.

VanEck Gold Miners ETF (GDX)

Those who want to take an indirect approach to investing in commodities can buy shares in the publicly traded companies that produce them. An advantage to this approach is that companies can add value to themselves over time, whereas the underlying commodities simply rise and fall as demand and supply dictate.

This approach also introduces company-specific risk, such as adverse weather conditions hurting a crop or an ill-timed acquisition, or mining project costs that spiral out of control.

This fund offers an alternative to both futures-backed and physically backed funds. It 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.

Gold miners’ stocks can outperform the price of gold as the metal rises in value because operating and financial leverage can lead to a higher percentage of increased free cash flow.

GDX has net assets of $11.6 billion as of Jan. 31 and an expense ratio of 0.51%.

Global X Uranium ETF (URA)

An example of the volatility inherent in commodities, uranium prices have been spiking recently.

Executives at micro-reactor technology company Nano Nuclear Energy Inc. say the radioactive metal’s price has been “boosted by pledges to triple nuclear power by mid-century, supply hiccups from producers such as Cameco and the looming threat of a ban on Russian exports to the West.”

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%, but it currently has a 6.1% yield.