Commodity ETFs

Understanding commodity ETFs

Commodities are raw materials or primary agricultural products that can be bought or sold, and these can include:

Precious metals such as gold or silver
Energy resources such as oil
Agricultural goods such as coffee beans
Industrial metals such as copper or aluminium

Commodities can be logistically impractical to transport and store, but commodities investing does not have to be complicated. Commodity ETFs provide investors exposure to physical commodities or commodity-linked instruments, all through the benefit of a highly liquid and relatively low-cost ETF vehicle. Rather than holding the physical commodities themselves, commodity ETFs could also gain exposure through:

Futures contracts
Equity in commodity-producing companies
Swaps or other derivatives
Single-country ETFs in cases where countries are highly tethered to the production and export of a particular commodity

Benefits of investing in commodities

Investing in commodity exchange-traded products (ETPs) can offer several advantages for investors seeking exposure to the commodities market. Here are some reasons why individuals might choose to invest in commodity ETPs.

Hedge against inflation

Commodity prices have historically risen in tandem with inflation. Investing in broad or single commodity ETPs can help hedge against inflation in portfolios.

Diversification

Commodity prices, influenced by factors like weather and geopolitics, have generally shown lower correlation to stocks and bonds. Investors can use them for portfolio diversification.

Potential returns

Commodities tend to be cyclical and can diversify portfolios across business cycles. Time lags in commodities production can contribute to demand and supply growth mismatches and drive cyclicality.

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