Commodity ETF

AAA

DEFINITION of 'Commodity ETF'

Exchange-traded funds that invest in physical commodities such as agricultural goods, natural resources and precious metals. A commodity ETF may be focused on a single commodity and hold it in physical storage or may invest in futures contracts. Other commodity ETFs look to track the performance of a commodity index that includes dozens of individual commodities through a combination of physical storage and derivatives positions.

Because many commodity ETFs use leverage through the purchase of derivative contracts, they may have large portions of uninvested cash, which is used to purchase Treasury securities or other nearly risk-free assets.

INVESTOPEDIA EXPLAINS 'Commodity ETF'

Commodity funds often create their own benchmark indexes that may include only agricultural products, natural resources or metals. As such, there is often tracking error around broader commodity indexes like the Dow Jones AIG Commodity Index. Even so, any commodity ETF should be passively invested once the underlying index methodology is in place.

Commodity ETFs have soared in popularity because they give investors exposure to various commodities without them having to learn how to purchase futures and/or other derivative products.

VIDEO

Loading the player...
RELATED TERMS
  1. Commodity Price Risk

    The threat that a change in the price of a production input will ...
  2. Dalian Commodities Exchange

    A commodities exchange located in Dalian, China. The Dalian Commodities ...
  3. Commodity Market

    A physical or virtual marketplace for buying, selling and trading ...
  4. Commodity-Backed Bond

    A commodity-backed bond is a type of debt security which is linked ...
  5. Euro ETF

    An exchange-traded fund that invests in the euro currency, either ...
  6. Commodity Pool Operator - CPO

    Persons or limited partnerships responsible for investing a commodity ...
RELATED FAQS
  1. What are the benefits of using ceteris paribus assumptions in economics?

    Most, though not all, economists rely on ceteris paribus conditions to build and test economic models. The reason they do ... Read Full Answer >>
  2. How is fair value calculated in the futures market?

    The fair value is the theoretical calculation of how a futures stock index contract should be valued considering the current ... Read Full Answer >>
  3. What is the difference between the rule of 70 and the rule of 72?

    The rule of 70 and the rule of 72 give rough estimates of the number of years it would take for a certain variable to double. ... Read Full Answer >>
  4. What are the differences between an MLP exchange traded fund (ETF) and an MLP exchange ...

    The main difference between a master limited partnership (MLP), exchange-traded fund (ETF) and an MLP exchange-traded note ... Read Full Answer >>
  5. What are the major types of insurance policies that insurance companies will offer?

    The principal commodities used in producing chemicals are oil, natural gas, coal and a wide variety of metals and minerals. ... Read Full Answer >>
  6. What is the risk return tradeoff for bonds?

    Macaulay duration and modified duration are mainly used to calculate the durations of bonds. The Macaulay duration calculates ... Read Full Answer >>
Related Articles
  1. Mutual Funds & ETFs

    6 Popular ETF Types For Your Portfolio

    Exchange traded funds are an extremely popular diversification tool that can protect your portfolio during troubled periods.
  2. Mutual Funds & ETFs

    All Weather Investing With ETFs

    All Weather investment strategies can shield investors during the worst bear markets.
  3. Active Trading

    Commodities: The Portfolio Hedge

    These diverse asset classes can provide downside protection and upside potential. Find out how to use them.
  4. Mutual Funds & ETFs

    Water: The Ultimate Commodity

    Opportunities to invest in this scarce resource are flowing freely - dive in!
  5. Options & Futures

    Hotshots Needed For Commodity Trading Advisor Positions

    If you can multi-task and you enjoy a good challenge, this lucrative career could be a perfect fit.
  6. Options & Futures

    Commodities That Move The Markets

    Find out how the everyday items you use can affect your investments.
  7. Investing

    Using Technical Analysis In The Gold Markets

    The quest for this shiny commodity has made millionaires of paupers and, on the flip side, ruined many an investor.
  8. Insurance

    Futures Fundamentals

    For those who are new to futures but want a solid understanding of them, this tutorial explains what futures contracts are, how they work and why investors use them.
  9. Mutual Funds & ETFs

    Exchange-Traded Funds (ETFs)

    This vehicle combines the diversification of a mutual fund with the flexibility of a stock. Learn more about them here.
  10. Fundamental Analysis

    Calculating Future Value

    Future value is the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today.

You May Also Like

Hot Definitions
  1. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  2. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  5. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  6. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
Trading Center