It is human nature that, when financial markets get volatile, investors tend to retreat to hard assets.That’s where commodities ETFs, or exchange-traded funds, can come in.
There can be comfort in devoting at least a portion of your portfolio to hard goods—like oil, gold, wheat and all the other critical commodities that have clear, easy-to-understand value. “For many investors, commodities ETFs can serve as a good slice of a diversified portfolio,” says Todd Rosenbluth, head of research at data and analytics firm VettaFi. While not a basic building block like stocks or bonds, experts say it’s reasonable for many investors to have commodities make up 5% or 10% of their portfolios.
And, because consumers always need these goods, commodities can serve as a hedge against rising prices and market turmoil. “They can also be a safe haven during times of inflation and market volatility,” says Rosenbluth.
A caveat: This “safe haven” can itself be volatile, thanks to the nature of supply and demand. That’s why after a couple of strong years—as both stocks and bonds sank and inflation cranked up—commodities have more recently been undergoing price slumps and investor outflows. For instance, while the popular commodity index S&P GSCI has five-year annualized gains of 2.1%, in the past 12 months it’s down 24%.
Also keep in mind, when it comes to ETFs, there are different ways to approach commodities—with some funds owning goods directly, others trading futures and still others buying stocks of companies that produce commodities. (A lot depends on their investment strategy. Plus, an asset such as gold is easier for funds to own than goods like oil or wheat.)
Above all, in this volatile niche, investors would be wise to choose their commodities ETFs judiciously. Some top choices to consider:
Best for precious metals
SPDR Gold MiniShares (GLDM)
Fund size: $6.4 billion
Annual fee: 0.1%
Holdings: Physical gold
No disrespect to the latest crypto ventures, but gold has been a classic store of value for thousands of years. That helps explain why the biggest commodities ETF of all is SPDR Gold Shares with $59 billion in assets, which is backed by physical gold rather than futures.
An even better option for investors, though, is its sibling fund Gold MiniShares. That’s because you are getting the same underlying asset at a lower expense ratio, 0.1% compared to Gold Shares’ 0.4%. In terms of the holdings, think of the fund difference this way: One share of MiniShares means ownership of roughly 1/100th of an ounce of gold, while Gold Shares means one-tenth.
“With commodity ETFs, cost matters,” says VettaFi’s Rosenbluth. “You own the same gold, but it’s a much lower-cost product. So you are getting the exposure you want, without paying higher fees.”
With smaller ETFs there are sometimes liquidity issues about being able to trade easily in and out. (With less investor activity, you encounter larger bid-ask spreads, which can make it harder to pull out and convert into cash, and eat into portfolio returns.) But the MiniShares fund has become so sizable on its own—now with over $6.4 billion in assets—that there are no such concerns, says Rosenbluth.
In an era where other asset classes have seemed particularly volatile—stocks, bonds, crypto—gold has been shoring up its reputation as a safe haven. The fund’s one-year returns of 6.7% and three-year annualized gains of 4.2% have led to high marks from fund researcher Refinitiv Lipper for both total returns, and capital preservation.
Of course the yellow metal goes in and out of favor depending on market appetites, but there is no denying it can serve as ballast and diversification for investors who want something to hold on to.
Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC)
Fund size: $4.94 billion
Annual fee: 0.59%
Holdings: Commodity futures
Most individual investors aren’t looking for multiple, overcomplicated commodities strategies to manage—they’d prefer a one-stop shop.
For that you can look to this Invesco fund, which gets you exposure to numerous types of assets with the click of a button. Currently crude oil and Brent amount to around 27% of its holdings, followed by gold at 11%, then others as varied as gasoline, sugar, soybeans, corn and copper.
The result is a fund that “does a really good job at balancing a reasonable strategy with lower fees,” says Bryan Armour, director of passive strategies research for Chicago-based fund analysts Morningstar. “I like it for its size and liquidity, and for the fact that there is no tax reporting.”
That is key: Many commodity ETFs are structured so that fund owners have to file K-1 tax forms on tax day, a headache exacerbated by the fact that they tend to get mailed out fairly late. Not so with this fund, along with others such as abrdn Bloomberg All Commodity Strategy K-1 Free ETF (BCI).
Investors will need a strong stomach for commodity volatility, since the past year hasn’t been kind to most funds in the space. But this ETF’s three-year return of 23% annually and five-year annualized gains of 4.7% are impressive, as are Refinitiv Lipper’s awards of its top score of 5 for consistent return, total return and capital preservation.
Best for materials
r SPDR (XLB)
Fund size: $5.8 billion
Annual fee: 0.1%
Holdings: Commodity-related stocks
Materials are the basic building blocks of an industrialized economy—metals, chemicals and so on—presumably you don’t want to be acquiring or storing any of this stuff in your basement.
While some materials have futures markets—where traders bet on delivery contracts backed by these assets—many don’t. This is why it can be much more elegant to get your exposure through equity in materials producers, which—instead of just locking you into the price of the underlying commodity,—also get you earnings, yield and upside share-price potential.
You can do so through the Materials Select Sector SPDR, for the minuscule management fee of 0.1%. “It’s one of the cheapest and most heavily traded materials ETFs on the market,” says Morningstar’s Armour. “Its low fee and trading costs give it a durable advantage, and it keeps its focus on the largest and highest-quality materials companies.” As a result, it has landed in the top 20% of funds in the natural resources category over the last 10 years.
Those factors help account for the fund’s four-star rating from Morningstar, which also labels the fund “above average” for its “people” and “parent” pillars, thanks to quality stewardship from State Street Global Advisors.
Be aware that the fund is quite concentrated, drawing from the biggest names in the business such as industrial gas companies Linde PLC and Air Products & Chemicals, paint producer Sherwin-Williams, and mining giant Freeport-McMoRan. For those seeking a broader set of companies, they might look to Vanguard Materials Index (VAW).
For a sector whose underlying holdings can be quite volatile, consider this consistency over time for the Materials Select Sector SPDR: Three-year annual returns of 16%, five-year of 8.4% and 10-year of 9.5%.
Best for agriculture
Invesco DB Agriculture Fund (DBA)
Fund size: $840.5 million
Annual fee: 0.85%
Holdings: Agricultural futures
It goes without saying that investing in a single agricultural commodity can be a highly speculative business. Just think back to the cult classic movie “Trading Places,” with so many fortunes hinging on the prospects of orange juice.
For individual investors, however, it makes more sense to have a basket of such commodities. For that you can look to the Invesco DB Agriculture Fund, which holds futures in 11 different commodities. Futures for cattle, cocoa, soybeans, coffee and corn each comprise over 10% of the total fund. Hogs, wheat and cotton follow close behind.
“There are a lot of benefits to diversification in the agricultural space,” says VettaFi’s Rosenbluth. With Invesco DB Agriculture, “you are going to have exposure to many different products, all of which are driven by different fundamentals.
Although agricultural prices can be notoriously turbulent, the fund’s three-year annualized return of 15% should give some comfort, as should its top ranking of ‘5’ for capital preservation from Refinitiv Lipper.
Meanwhile the expense ratio of 0.85% is not off-putting, given the complexity of assembling such a portfolio, and the fund is large and liquid enough to allow for easy trading.
“Not only is it well-diversified, but it’s reasonably priced. It’s a good one to consider, for all the benefits you’re getting,” says VettaFi’s Rosenbluth.
Best for energy
Energy Select Sector SPDR (XLE)
Fund size: $33.2 billion
Annual fee: 0.1%
Holdings: Energy industry stocks
The fact that the price of oil regularly whipsaws, presents a challenge for individual investors. While it can be profitable to have exposure to this lifeblood of the world economy, most of us won’t want to live with that kind of volatility.
One solution is to own stocks of energy producers, rather than the commodity itself, since the equities provide a steadier ride. To that end, the Energy Select Sector SPDR gets you stakes in the largest energy companies in the S&P 500.
“It has been a successful strategy,” says Morningstar’s Armour. “It has performed in the top percentile of funds in the equity energy category. Its fee is among the lowest in its category, making its low cost an advantage.”
Investors preferring to focus specifically on oil futures typically look to the United States Oil Fund (USO), the largest such ETF at $1.6 billion in assets. But with one-year returns currently at about negative 30%, such a strategy is not for the faint of heart.
Instead, most investors would be wise to surf these choppy seas with the equity holdings of Energy Select Sector SPDR, whose one-year loss is a more palatable 8.26%.
If you need convincing, three-year annual returns of 33% and five-year gains of 6.4% a year should do quite nicely. It’s Armour’s “favorite” energy ETF, awarded four stars in Morningstar’s ranking system with “a cost-effective approach to hedging energy-specific inflation.”
An X-ray of holdings reveals some very familiar names, with Exxon Mobil and Chevron the biggest, at 23% and 20% of the portfolio respectively. Not to be overlooked: A yield of 4.3%, a handsome payout which should smooth any market ups and downs and bring a smile to investor faces.
How we picked
We started with fund researcher Refinitiv Lipper. which tracks 123 commodities ETFs across a variety of subcategories, with some owning the physical product, and many owning futures contracts.
We then sought funds that had a consistent track record of quality management, above-average relative returns and below-average fees. Beyond that, we looked for funds that had broad-based portfolios that produced consistently for investors over time.
We also consulted with fund experts at fund analysts Morningstar, Refinitiv Lipper and investor data firm VettaFi to come up with highly-ranked options offered by stable, trustworthy providers. Data such as fund returns, yields, expense ratios and assets under management are as of June 9, 2023.
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