There's been an incredible rebound in commodities exchange-traded funds (ETFs) this year, most of which are on a bullish run. With the COVID-19 vaccination rollout and markets opening up, investors have turned to physical assets in 2021, with the hopes of beating the market. Pro investors are prioritizing physical assets to diversify and maintain a solid investment portfolio.
Here we present our top picks of the commodity ETF pack.
Where Can I Trade Commodity ETFs?
Trading commodity ETFs is a straightforward process once you find a broker that supports ETF trading. As the intermediary between you and the market, the broker should be regulated by the UK’s Financial Conduct Authority (FCA), the USA’s Securities and Exchange Commission (SEC), or the Australian Securities and Investment Commission (ASIC) in Australia.
Some brokers that support ETF trading are:
- Ally Invest
- Merrill Edge
- Fidelity Investments
- Charles Schwab
- TD Ameritrade
What Is a Commodity ETF?
For those who are familiarizing themselves with the stock market, the many investment strategies can often appear intimidating and daunting. There is day-trading, options trading, swing trading, dividend investing, dividend growth investing, and more. As a result, beginners might experience analysis paralysis and therefore never invest at all. Fortunately, ETFs are a perfectly acceptable investment strategy for investors of any experience level.
Here is a quick rundown of what ETFs are:
- An exchange-traded fund is a basket of securities that means you don’t have to buy the underlying securities individually.
- ETFs are publicly traded securities listed on major stock exchanges such as the NYSE and NASDAQ, and they can be traded just like stocks.
- Most ETFs incur lower expense ratios than managed funds. For example, 0.5 % (for an ETF) vs. 1%+ (for a managed fund).
- ETFs track a broad index of stocks, so they provide instant diversification.
- ETFs typically have a low turnover of securities, thus generating little to no capital gain taxes.
As the name implies, an ETF commodity index tracks the spot price of physical commodities, including natural resources (oil/gas), precious metals (gold/silver), and agricultural goods (grains/livestock/coffee).
Invest in Commodity ETFs in 3 Steps
Open A Trading Account
Choose a broker that is regulated by top-tier authorities. You'll only need to sign up to the platform and fill in the KYC (know your customer) details such as your name, address, experience, and profession. Your details must be verified with supporting documentation such as social security number in most cases.
Choose A Commodity ETF
Using our list as a guide, locate your candidate ETFs in the broker’s catagorised list, which should be searchable on the name of the ETF. Do your own research to refine the list of attractive ETFs, perhaps by clicking each one for more information.
Place Your Trade
ETFs tend to be very liquid (just like stocks) and can be traded during market hours (just like stocks and unlike mutual funds). Your broker should allow you to use the same order types that you would use to buy and sell stocks: “quote and deal” market orders, limit orders, and stop orders.
Best Commodity ETFs To Buy Now
We have compiled a top ten list of commodity ETFs based on historical performance, liquidity, and analysts’ opinions as follows.
- United States Oil Fund (USO)
- Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC)
- iShares Silver Trust (SLV)
- SPDR Gold Trust (GLD)
- Invesco DB Commodity Trading (DBC)
- iShares S&P GSCI Commodity-Indexed Trust (GSG)
- Aberdeen Standard Platinum Shares ETF (PPLT)
- Granite Shares Gold Trust (BAR)
- Teucrium Corn Fund (CORN)
- United States Copper Index Fund (CPER)
Here is some more information about our five favourite commodity ETFs.
1. United States Oil Fund (USO)
The global oil market hit a snag due to the coronavirus pandemic. However, with fewer travel restrictions and industries starting to open up in 2021, the oil market has got a new lease of life. The USO ETF allows you to milk this oil “cash cow” that is now definitely on a bullish run.
2. Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC)
This ETF comprises some of the most heavily traded commodities across energy, industrial metals, precious metals, and agriculture. With an extensive selection of commodities (assets of over 3.1 billion dollars), an annual return of nearly 70% in the past year, and an expense ratio of only 0.59 %, it's hard to fault this ETF.
3. iShares Silver Trust (SLV)
Founded in 2006, SLV has been mainly on a bull run. This ETF is pegged to tangible silver rather than the mining companies' valuations. Therefore, you need not worry about futures contracts and volatility associated with most mining companies' stocks. Each share of this ETF corresponds to a specific quantity of silver, making it an excellent option for investors to own physical bullion and not deal with storage costs.
4. SPDR Gold Trust (GLD)
This commodities ETF has seen steady growth in valuation over the years, just like gold, the precious metal it’s built on. Many generations have valued gold, and investors see it as a stable and safe investment. This precious metal commodity protects you from the overall decline in economic conditions brought about by issues such as rising inflation. Other great alternatives to GLD are Aberdeen Standard Physical Gold Shares ETF (SGOL) and Granite Shares Gold Trust (BAR).
5. Invesco DB Commodity Trading (DBC)
Founded in 2006, this ETF is one of the largest and is a good option to invest in if you want a broad-based commodity asset. DBC tracks price changes in gasoline, natural gas, crude oil, silver, Aluminum, gold, zinc, Copper grade A, light sweet crude oil, heating oil, soybeans, sugar, wheat, and corn. The DBC ETF comprises speculative amounts of all these commodities, meshed together well by the management. As a result, this ETF has turned a profit for investors ever since its inception.
Expert Tip on Investing in Commodity ETFs“ An ETF with low AUM (assets under management), usually less than 50 million dollars, can be subject to higher trading costs that erode your investment returns. Most ETFs are experiencing tremendous growth due to economic conditions, and trading volume has never been higher (which indicates that ETFs are increasingly being used as a trading tool in search of arbitrage opportunities). ”- Mir Kamrul
Why Trade Commodity ETFs?
ETFs have low costs, offer great portfolio diversification, and are easy to buy and sell. They are ideal for passive investors who want to grow their investments long into the future without actively managing a portfolio of separate investments.
It’s worth noting that the world’s largest consumer of commodities, China, is growing its economy at a steady pace to reach pre-pandemic rates. Therefore, there may be no better time to invest in a commodity ETF.
Frequently Asked Questions
Some do, some don't, depending on whether or not the ETF holds dividend-paying stocks.
Commodity markets typically appeal more to traders than investors, mainly because commodities are traded in forward or futures contract markets that have expiries from one to three months. A commodity ETF trader is looking to predict commodity price movements rather than investing in businesses that generate value.
The best commodity ETF today can be superseded at any time. Raw materials are a crucial part of the supply chain for every company and a vital part of the global economy. So, study the market and invest in products in high demand at that particular point in time using commodity ETFs.
Commodity ETFs are great for individual investors and institutions that want to gain exposure to physical goods or shield themselves from losses of negatively correlated assets such as stocks and bonds.
If you want exposure to the S&P 500 index or you’re looking for dividend growth, there's an ETF for you. When it comes to commodity ETFs, it’s all about the underlying assets’ supply and demand characteristics, which is something you’ll need to learn as a beginner.
Commodity ETFs offer beginners the opportunity to invest in commodities as intuitively as buying stocks and without having to learn about futures contracts or leveraged derivative investments.