A lot of investors are hesitant to get into individual commodities, but today's commodities exchange-traded funds (ETFs) make this space accessible to just about every class of investor. Commodities tend to be volatile, and the market in 2019 reflects that. After moving downward for the last part of 2018, broad commodities ETFs have seen their prices increase recently.
Many investors use commodities as a hedge against inflation. Furthermore, commodities help diversify investment portfolios given their generally negative correlation with other asset classes, such as stocks and bonds. Commodities are often seen as a safe haven in times of market uncertainty. See more on using commodities to hedge portfolios.
If you're looking for commodities exposure but you're not sure where to park your dollars, commodities ETFs provide you with a lot of choices. There are ETFs that track a broad basket of commodities as well as funds that focus on a single type of commodities, such as oil or precious metals.
The three commodities ETFs below were chosen based on a combination of assets under management (AUM) and performance. All figures were current as of Apr. 5, 2019.
- Commodities can be used as a hedge against inflation and help with portfolio diversification due to their negative correlation to other asset classes.
- Investing in individual commodities can be risky, but commodity ETFs can lower associated risks.
- Commodities can be a safe haven during times of market turmoil.
Invesco DB Commodity Tracking (DBC)
DBC tracks an index of 14 commodities using futures contracts for exposure. It tackles the weighting problem creatively, capping energy at 60% to allow for more exposure to non-consumables such as gold and silver. The fund's large size also gives it strong liquidity.
DBC's one-year, three-year and five-year annualized returns of -6.1%, 6.3% and -8.9%, respectively, reflect the volatility in the commodities market.
DBC is by and large the largest ETF in the commodity space in terms of AUM.
iPath Pure Beta Broad Commodity ETN (BCM)
- Issuer: iPath
- Average Volume: 1,713
- Net Assets: $55.5 million
- 2019 YTD Return: 10.22%
- Expense Ratio (net): 0.70%
BCM picks futures contracts based on the Barclays Commodities Index, which is actually weighted based on liquidity and capped at 35% for commodities sectors and 20% for commodities groups. For that reason, energy is under-represented and precious metals are over-represented compared with other broad commodities index funds, in which energy can account for 65% or more. As currently constituted, WTI crude and gold can be close to equal in terms of percentages in BCM's holdings at times (currently at 10.9% and 18.3%, respectively).
The one-year and three-year annualized returns for BCM come in at -5.6% and 4.7%, respectively.
First Trust Global Tactical Commodity Strat ETF (FTGC)
- Issuer: First Trust
- Average Volume: 62,600
- Net Assets: $172 million
- 2019 YTD Return: 6.1%
- Expense Ratio (net): 0.95%
FTGC is the only actively managed broad commodities fund. It is also structured a bit differently as an open-ended fund under the 1940 Investment Company Act. FTGC gains commodities exposures through its subsidiary in the Cayman Islands, which holds futures contracts and other structured commodities products. It currently holds a basket of around 30 commodities futures, with the top 10 holdings including unusual items such as soybean oil, live cattle, and cocoa.
Most commodity ETFs carry a lot of exposure to oil and gold.
You'll pay a bit more in fees for this actively managed fund, but it's still in line with other specialty-ETFs. Despite its unusual structure, the fund is taxed like an equity fund—investors won't receive a K-1 at the end of the year. FTGC's inception date was October 2013. One-year and three-year annualized returns are -8.7% and -0.75%, respectively.