Commodity ETF

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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.

BREAKING DOWN '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.

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