Commodity ETFs

Is investing in commodity ETFs a wise decision, and how can you select the best-performing ones?

Commodities are the unsung heroes of our daily lives. They include everything from the cotton in your T-shirt to the fuel in your car, and even the rare metals powering your smartphone. Nations have warred over natural resources for centuries – but hold on, Conquistador. Nowadays, you can invest in commodities with just a few clicks of a mouse.

By investing in a commodity exchange-traded fund (ETF), you can diversify your portfolio while also taking a stake in the building blocks of our everyday lives. As the world grapples with an ever-growing population and a sweeping green revolution, the demand for these resources is skyrocketing.

Best commodity ETFs

Finding the best commodity ETFs can be a challenge, with all of the contenders offering a pick-and-mix of different natural resources for you to invest in with an ETF.

Commodities tend to be a volatile area of investing with big price swings and lots of fluctuations and performance can vary wildly day to day. So to give you an idea of what’s out there, here are the 5 largest commodity ETFs.

Table: sorted by fund size based on data from JustETF.com
IconETF5-year performanceFund sizeLink to invest
Invesco iconInvesco Bloomberg Commodity UCITS ETF Acc (CMOP)39.01%£1.9 billionInvest with Hargreaves LansdownCapital at risk
amundi icon Amundi Bloomberg Equal-weight Commodity ex-Agriculture UCITS ETF Acc (COMG)46.41%£1.3 billion Invest with InvestEngineCapital at risk
L&G iconL&G Multi-Strategy Enhanced Commodities UCITS ETF (ENCG)N/A%£1.3 billionInvest with Hargreaves LansdownCapital at risk
iShares iconiShares Bloomberg Roll Select Commodity Swap UCITS ETF USD (ROLG)62.20%£1.1 billionInvest with InvestEngineCapital at risk
iShares iconiShares Diversified Commodity Swap UCITS ETF (COMM)39.39%£1.1 billionInvest with Hargreaves LansdownCapital at risk

All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.

How to invest in commodity ETFs

  1. Open a share dealing account. To invest in commodity ETFs, you’ll need to open a share trading account that offers ETFs as an option.
  2. Fund your account. The next step is to deposit money into your account to buy shares or invest in a fund, either by bank transfer or using a debit card.
  3. Choose your commodity ETFs. Either select a broad commodity ETF or one focusing on a specific commodity and do some research. Once you know what you want, find the commodity ETF on your platform.
  4. Review and hit buy. It’s as simple as that.

Compare share dealing accounts to find the right platform for you. Make sure to use a platform with access to international markets or a large exchange-traded fund (ETF) selection if you want to invest in top commodity ETFs from around the world.

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What are commodity ETFs?

Commodity ETFs offer a convenient way to invest in raw materials like metals, agricultural goods, or crude oil – all with a single investment.

These ETFs either directly hold physical commodities or track their prices using derivatives such as futures contracts. They’re ideal for investors looking to diversify their portfolios without having to find the cupboard space for a few barrels of oil, a herd of cattle and fifty bushels of wheat.

Why do people want to invest in commodity ETFs?

Here are some of the reasons investors might want to add commodity ETFs to their portfolios:

  • Green revolution. The move towards a greener economy is accelerating. Governments are focusing on reducing fossil fuels, emphasising renewables like wind and solar power, along with encouraging the widespread adoption of electric vehicles. This shift is increasing demand for metals like copper, cobalt, nickel, and lithium – essential for these technologies. So, commodity ETFs are strategic investment to tap into this growing sector​​.
  • Portfolio diversification. Commodities have a relatively low correlation with major stock and bond indices. That gives investors some ballast or a wildcard to play if your stock or bond portfolio goes down the toilet.
  • Inflation hedge. During times of inflation, commodity prices generally rise, making commodity ETFs an effective hedge. This is particularly relevant in the current climate, with high inflation impacting the UK, Europe and the US.
  • Rising global tensions. Commodity ETFs also offer a form of protection against the impact of global conflicts on markets. For instance, Russia’s invasion of Ukraine significantly impacted the prices of commodities like wheat, natural gas, metals, and vegetable oils. Similarly, the Gulf War caused crude oil prices to spike at the start of the 1990s. In general, conflicts tend to disrupt supply chains.

But before you fill your house with gold coins like Scrooge McDuck or start planting wheat in your backyard, keep reading because there are numerous risks associated with investing in commodity ETFs – it’s not all just swimming in riches and making hay while the sun shines.

The risks of investing in commodity ETFs

Many investors steer clear of commodities, seeing the asset class as inferior to stocks and bonds. So, before buying them for your own portfolio, have a think about these reasons that naysayers often cite for keeping well away:

  • Non-yielding assets. Warren Buffett likens gold to a useless pet rock, noting, “If you buy an ounce of gold today and you hold it 100 years…you’ll [still] have one ounce of gold, and it won’t have done anything for you in between.” This quote underlines a problem with ETFs that simply hold a commodity or track its price with future contracts, they don’t generate income over time.
  • Gut-wrenching volatility. Commodity prices can swing dramatically due to factors like geopolitical tensions, weather anomalies, and shifts in supply and demand dynamics. This volatility means your investments could either soar to great heights or plummet to new depths, depending on market conditions.
  • High prices don’t often last. Analysts commonly say, “high prices cure high prices.” Imagine, for instance, a sudden spike in tin prices brought about by the collapse of a key mine in Peru. This initial surge acts as a signal, prompting consumers to reduce their tin usage while encouraging other producers to ramp up their output. As a result, the market usually stabilises quickly, demonstrating the self-correcting nature of commodity markets in response to price fluctuations.
  • The tracking error tango. When you dance with commodity ETFs, especially those using derivatives like futures contracts, be prepared for the possibility of tracking errors. These ETFs may not always step in perfect rhythm with their benchmark indices, which could lead to performance that’s out of sync with your expectations​​.
  • Costs. You’ll want to think carefully not only about the commodities each fund offers but also the fees they charge, as these can take a massive bite out of your returns over the long term.

Expert comment: What's the best commodity ETF?

georgesweeney profile pic
George Sweeney

Deputy editor

This is largely going to depend on the timeframe you're looking at. A better idea is to research the types of commodities you want to invest in first. Some commodity ETFs are broad and track a whole bunch of materials, but others focus on a particular resource.

Once you've decided if you want a broad or highly-focused approach, you can start digging around for the best commodity ETF options. Along with performance, you'll also want to look at the ongoing costs of the ETF. Keep in mind that past performers might not excel in future. The world is changing and the materials we relied on yesterday, like oil, may not play such a significant role in the coming decades.

Pros and cons of commodity ETFs

  • The green revolution is ramping up demand for materials and metals
  • Commodity ETFs provide a unique way to diversify
  • In inflationary times, commodities often rise in value
  • Some commodity ETFs don’t generate dividends
  • Commodity markets can experience extreme volatility
  • High commodity prices often self-correct, potentially reducing long-term gains

Bottom line

Investing in commodity ETFs is like grabbing a share of the Earth’s bounty. They can encompass a diverse array of essential resources from metals and oil to grains. This type of investment not only diversifies your portfolio but also positions you to capitalise on the burgeoning demand for materials crucial to the green revolution.

However, caution is the name of the game in these turbulent markets. It’s crucial to balance your investments – overloading your portfolio with commodities could leave you as vulnerable as a lone oil rig in a tsunami.

FAQs

All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.

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