Inflation is on a tear right now and you might be looking for ways to hedge your dollars so that you can maintain your purchasing power.
One of the most effective ways to hedge inflation is to invest in commodities but it is an unfamiliar world for most investors since commodities are traded in futures contracts.
But fret not, the advent of ETFs has made its way to the commodity markets and allow investors to conveniently partake in the rise of commodity prices, although it comes with a drawback (explained in next section). Alternatively, investors can look at stocks of commodity companies, which would indirectly benefit from higher commodity prices.
Below we will discuss the myriad commodity ETFs for your consideration:
- Best Commodities ETFs
- Best Energy Sector ETFs
- Best Precious Metals ETFs
- Best Industrial Metals ETFs
- Best Agriculture ETFs
But first…
The problem with futures-based ETFs
Most futures-based ETFs buy monthly contracts so as to track closer to the spot prices of the underlying commodities. But the ETF managers have no intention to take physical deliveries and hence they would sell when the contracts are near maturity and buy next month’s contract, thereby extending the maturity date.
If the futures market is in contango (where contracts with longer maturity are more expensive), the ETFs would be forced to pay more each time they roll over the contracts to the following month. They sell low and buy higher, resulting in a drag to the ETFs returns.
But the futures market can also be in backwardation (contracts with longer maturity are cheaper) and ETFs would be able to make positive roll yields by buying the further contracts.
It is more likely that investors will face a backwardation during a commodity bull run as having the commodity now (spot) is more valuable than in the future. This is good news as commodity ETFs benefit from backwardation.
This tells us that commodity ETFs are not meant to be held over a long term as they are cyclical and may go into contango eventually when supply and demand balances, posing a drag on the ETF returns.
So the contango isn’t really a problem if it is just a temporary inflation hedge in your portfolio.
The best broad-based commodity indices
Commodities fall under several categories:
- Energy (crude oil, natural gas, coal, etc)
- Industrial metals (copper, iron ore, nickel, etc)
- Precious metals (gold, silver, palladium, etc)
- Agriculture (wheat, corn, soybean, etc)
- Livestock (live cattle, lean hog)
Hence, we must identify the broad-based indices that could track all, if not most of the commodities in the market, especially when you just want to buy one ETF. Moreover, ETFs are mostly passively managed and the indices they track become the most important consideration for getting the right exposure. Here are three recognised commodity indices:
- S&P Goldman Sachs Commodity Index (GSCI)
- Bloomberg Commodity Index (BCOM)
- Rogers International Commodity Index (RICI)
We will skip the RICI since the fund size is small at the moment compared to the ETFs tracking the other two indices.
Best Commodities ETFs
Here are the three best commodity ETFs that give you exposure to a broad range of commodities, after comparing fund sizes, underlying indices and expense ratios.
| iShares GSCI Commodity Dynamic Roll Strategy ETF | abrdn Bloomberg All Commodity Strategy K-1 Free ETF | SPDR S&P Global Natural Resources ETF* | |
|---|---|---|---|
| Exchange | NASDAQ | NYSE Arca | NYSE Arca |
| Ticker | COMT | BCI | GNR |
| Index | S&P GSCI Dynamic Roll (USD) Total Return Index | Bloomberg Commodity Index Total Return | S&P Global Natural Resources Index |
| Expense Ratio | 0.48% | 0.25% | 0.4% |
| Type of ETF | futures | futures | stocks |
| Fund Size | US$4 billion | US$1 billion | US$3.5 billion |
| Top Holdings | Energy 60.1% Agriculture 18.5% Industrial Metals 11.7% Livestock 5.5% Precious Metals 4.2% | Energy 33.3% Agriculture 29% Precious Metals 17.8% Industrial Metals 15.4% Livestock 5% | Nutrien 6.1% BHP 5.3% Shell 4.3% Exxon Mobil 4.2% Chevron 3.7% Glencore 2.9% Freeport-McMoRan 2.8% Anglo American 2.7% TotalEnergies 2.5% |
As of 7 Apr 2022
*If you prefer to get exposure to commodities via stocks and not futures contracts, you can consider the SPDR S&P Global Natural Resources ETF (GNR) instead. It covers the largest stocks in three natural resources sectors – agriculture, energy, and metals and mining.
Best Energy Sector ETFs
Popular energy ETFs mostly track crude oil prices while natural gas comes in second. There used to be a coal ETF but it has since been delisted due to a lack of demand. Hence, the two best energy ETFs are related to crude oil and natural gas. Oil and gas prices are cyclical and coupled with high expense ratios, these ETFs are not meant for long-term holdings but for short to mid-term exposures.
| United States Oil Fund | United States Natural Gas Fund | |
|---|---|---|
| Exchange | NYSE Arca | NYSE Arca |
| Ticker | USO | UNG |
| Index | West Texas Intermediate (WTI) crude oil futures contract (near month) | Natural gas futures contract (near month) |
| Expense Ratio | 0.83% | 1.35% |
| Fund Size | US$3.2 billion | US$416 million |
| Top Holding | WTI crude oil futures contracts | Natural gas futures contracts |
As of 7 Apr 2022
Besides getting the direct exposure to the commodities, you can consider investing in the stocks of energy producers.
There are a handful of energy producer ETFs and are more popular than the outright crude oil and natural gas plays mentioned above. Case in point: Energy Select Sector SPDR Fund (XLE) has a fund size of $36 billion and that’s 10 times larger than the United States Oil Fund.
If you are cost conscious, Fidelity MSCI Energy Index ETF (FENY) would be the cheapest at 0.08% annual fees.
Natural gas producers on the other hand have very limited ETFs to choose from – First Trust Natural Gas ETF is the largest of all.
Many of the energy producers such as EOG Resources and ConocoPhillips are involved in both crude oil and natural gas, and hence XLE or FENY would suffice to get you some natural gas exposure and are less costly.
| Energy Select Sector SPDR Fund | Fidelity MSCI Energy Index ETF | First Trust Natural Gas ETF | |
|---|---|---|---|
| Exchange | NYSE Arca | NYSE Arca | NYSE Arca |
| Ticker | XLE | FENY | FCG |
| Index | Energy sector of the S&P 500 Index | MSCI USA IMI Energy Index | ISE-Revere Natural Gas |
| Expense Ratio | 0.10% | 0.08% | 0.60% |
| Fund Size | US$38 billion | US$1.5 billion | US$713 million |
| Top Holdings | Exxon Mobil 22.6% Chevron 21.7% EOG Resources 4.8% ConocoPhillips 4.5% Schlumberger 4.3% Pioneer Natural Resources 4.1% Occidental Petroleum 3.8% Valero Energy 3.2% Williams Companies 3.1% | Exxon Mobil 19.5% Chevron 17.4% ConocoPhillips 7.2% EOG Resources 3.9% Pioneer Natural Resources 3.3% Schlumberger 3.3% Marathon Petroleum 3.1% Occidental Petroleum 3.0% Valero Energ 2.4% Phillips 66 2.3% | Occidental Petroleum 4.7% EQT Corp 4.4% DCP Midstream 4.0% ConocoPhillips 3.8% EOG Resources 3.8% Southwestern Energy 3.7% Western Midstream 3.6% Antero Resources 3.6% Coterra Energy 3.5% Devon Energy 3.4% |
As of 7 Apr 2022
Best Precious Metals ETFs
This is the most popular group of commodity ETFs – SPDR Gold Shares (GLD) has a fund size of $68 billion, almost double the size of XLE. It is not difficult to comprehend considering that gold has been historically recognized as a store of value, even before fiat money was in circulation.
Physical gold are stored in vaults and ETFs are able to hold physical gold without the need to get into futures contracts. This is a key difference between precious metals and the rest of the commodities.
GLD is the most costly at 0.4% expense ratio but there are many other cheaper ones which have the same physical gold backing. Cost becomes a primary consideration here and iShares Gold Trust Micro (IAUM) is the cheapest at 0.15% expense ratio.
Besides gold, you can get exposure to other precious metals such as silver, platinum and palladium via the ETFs. Or buy the abrdn Physical Precious Metals Basket Shares ETF (GLTR) to get exposure to all these precious metals.
| iShares Gold Trust Micro | abrdn Physical Silver Shares ETF | abrdn Physical Platinum Shares ETF | abrdn Physical Palladium Shares ETF | abrdn Physical Precious Metals Basket Shares ETF | |
|---|---|---|---|---|---|
| Exchange | NYSE Arca | NYSE Arca | NYSE Arca | NYSE Arca | NYSE Arca |
| Ticker | IAUM | SLV | PPLT | PALL | GLTR |
| Index | LBMA Gold Price | LBMA Silver Price | LPPM platinum prices | LPPM palladium prices | LPPM and LBMA prices |
| Expense Ratio | 0.15% | 0.30% | 0.6% | 0.6% | 0.6% |
| Fund Size | US$1.3 billion | US$1.2 billion | US$1.1 billion | US$440 million | US$1.2 billion |
| Top Holdings | Physical gold bullions | LBMA Silver Price | Physical platinum bullions | Physical Palladium bullions | Physical bullions of Gold Silver Platinum Palladium |
As of 7 Apr 2022
Best Industrial Metals ETFs
Industrial metals ETFs don’t seem to be popular. The biggest fund currently is Invesco DB Base Metals Fund (DBB) with just $693 million assets under management. That’s small relative to the other ETFs we have examined thus far.
Moreover, DBB has only three metals in its portfolio – aluminium, copper and zinc. There are no nickel, tin, iron ore and lead exposure.
abrdn Bloomberg Industrial Metals Strategy K-1 Free ETF (BCIM) is similar to DBB except it has exposure to nickel. But the fund size below $50 million pose the risk that it might be delisted eventually. Hence, DBB remains the best amidst a lack of competing ETFs in the industrial metals segment.
| Invesco DB Base Metals Fund | |
|---|---|
| Exchange | NYSE Arca |
| Ticker | DBB |
| Index | DBIQ Optimum Yield Industrial Metals Index Excess Return |
| Expense Ratio | 0.77% |
| Fund Size | US$694 million |
| Top Holdings | Aluminium Copper Zinc |
As of 7 Apr 2022
Similar to energy ETFs, we think that buying the mining ETFs would offer a better exposure to the industrial metals industry.
Of which, iShares MSCI Global Metals & Mining Producers ETF (PICK) would be the best choice.
| iShares MSCI Global Metals & Mining Producers ETF | |
|---|---|
| Exchange | Cboe BZX |
| Ticker | PICK |
| Index | MSCI ACWI Select Metals & Mining Producers Ex Gold & Silver Investable Market Index |
| Expense Ratio | 0.39% |
| Fund Size | US$1.8 billion |
| Top Holdings | BHP 14.6% Rio Tinto PLC 6.7% Cia Vale Do Rio Doce 6.1% Freeport McMoran 5.4% Anglo American 5.2% Glencore 5.1% Nucor 3.2% Rio Tinto 2.5% Fortescue Metals 2.1% ArcelorMittal 1.5% |
As of 7 Apr 2022
Best Agriculture ETFs
Last but not least, we have the agriculture ETFs. This is our food source but we often take it for granted. Invesco DB Agriculture Fund (DBA) would give us a good overall exposure to the underlying that includes not just the wheat and the corn but also livestock such as live cattle and lean hogs.
| Invesco DB Agriculture Fund | |
|---|---|
| Exchange | NYSE Arca |
| Ticker | DBA |
| Index | DBIQ Diversified Agriculture Index Excess Return |
| Expense Ratio | 0.93% |
| Fund Size | US$1.9 billion |
| Top Holdings | Wheat 14.9% Corn 14.2% Soybeans 13.2% Sugar 11.3% Coffee 10.8% Live Cattle 10.3% Cocoa 9.8% Lean Hogs 8.5% Feeder Cattle 3.3% Cotton 2.9% |
As of 7 Apr 2022
Alternatively, a cheaper way to get access to agriculture is to buy the stocks of the producers. iShares MSCI Global Agriculture Producers ETF (VEGI) is a suitable and comprehensive option that includes even the farm equipment makers like Deere.
| iShares MSCI Global Agriculture Producers ETF | |
|---|---|
| Exchange | NYSE Arca |
| Ticker | VEGI |
| Index | MSCI ACWI Select Agriculture Producers Investable Market Index |
| Expense Ratio | 0.39% |
| Fund Size | US$235 million |
| Top Holdings | Deere 19% Nutrien 9.3% Archer Daniels Midland 8.2% Corteva 6.7% Mosaic 4.2% CF Industries 3.6% Kubota 2.9% FMC 2.7% Bunge 2.6% CNH Industrial 2.4% |
As of 7 Apr 2022
Which ETF should you choose?
Investing in commodities is not as direct as equities.
First, commodities are based on futures contracts and most investors are not familiar with these kind of derivatives. Second, ETFs have made commodity investing easier but they still introduce rollover disadvantages to investors should the futures market is in contango. Third, there are myriad ETFs to choose from with different exposures and fees.
But we have made it easier for you by identifying the best commodity ETFs for each category.
If you just want a broad exposure, abrdn Bloomberg All Commodity Strategy K-1 Free ETF (BCI) would be the most cost efficient option. If you still prefer stocks over futures contracts, SPDR S&P Global Natural Resources ETF (GNR) would be your best bet.
The rest of the commodity ETFs are narrower and will be useful if you know exactly which sub-sector you would like to get exposure to – energy, precious metals, industrial metals or agriculture; we have identify the best ETFs for each sector above.
Let us know if this is useful and if there are better options than the ones presented here!
And remember, commodity ETFs are not meant to be held over a long term as they are cyclical and may go into contango eventually when supply and demand balances, posing a drag on the ETF returns. I share how you can time your trades better at this live webinar.
