Investors worried about sticky inflation should take a closer look at commodity ETFs as hedges against rising prices.
History shows that commodities have proven resilient amid persistently rising prices. From energy sources to agricultural products to metals, commodities of many different flavors have naturally seen their values rise amid inflationary pressures.
Inflation is cooling, but still remains high
True, the latest consumer price index (CPI) reading showed inflation continues to ease, but investors should remain on guard. "We can safely say that we are past peak inflation, but it is too early to call victory against inflation," says Gargi Chaudhuri, head of iShares Investment Strategy, Americas at BlackRock. "Investors should continue to think about hedging against inflation and consider how higher interest rates for longer could affect their portfolios."
Hard assets like commodities and commodity ETFs are increasingly seen as an important part of a diversified portfolio, either as a hedge against rising prices or as a way to access returns that are uncorrelated to the broader stock market.
Still, the idea of engaging directly with commodity markets can be intimidating for investors. Many online brokers require a separate account or at least separate controls to trade futures, and even if you get over that hurdle, there's always the question of what to buy and sell – and when.
The nine commodity ETFs featured here can take some of the guesswork out the equation. To compile this list of the best ETFs focused on this diverse asset class, we looked for funds that are benchmarked to physical commodity markets, and provide a simple one-stop way to invest in your normal brokerage account.
Data is as of September 8.
SPDR Gold Trust
- Assets under management: $54.9 billion
- Expenses: 0.40%, or $40 annually for every $10,000 invested
One of the most popular commodity investments out there is gold, considering the precious metal is seen as a "store of value" that will hold strong in a rough environment. Additionally, gold has historically been uncorrelated to the stock market.
GLD is tied to physical gold bullion prices rather than mining stocks, and gives direct exposure to the precious metal. It has a long list of competitors on Wall Street, including the nearly $920-million GraniteShares Gold Trust (BAR) whose expense structure is less than half of GLD. However, what SPDR Gold Trust offers is a well-established product with a deep pool of liquidity.
"When economic conditions weaken or become uncertain, history shows that investors turn to perceived safe-have assets, like gold and bonds," says Mason Mendez, investment strategy analyst at Wells Fargo Investment Institute. "Relative to other asset classes, gold has historically outperformed equities on average," looking at monthly data going back to December 1967. Here at Kiplinger, staff economist David Payne gives a 30% chance a recession will hit in 2024.
iShares Silver Trust
- Assets under management: $10.1 billion
- Expenses: 0.50%
Though slightly smaller, the iShares Silver Trust (SLV, $21.01) is similar in many ways to the SPDR Gold Trust.
As far as commodity ETFs go, SLV is a fund that is tied to physical silver instead of physical gold. While silver is technically a precious metal, it has more common uses in industrial and commercial applications. These include electrical connections, solar panels, chemical catalysts and more. That means that silver is more tied to general economic activity, which has weighed it down in the last year or so.
However, this might also make silver an interesting play in the near term. As we potentially near the end of the geopolitical and inflationary disruptions that we've seen over the last year, then we could possibly see a big uptick in demand for silver that could lift this commodity fund.
As with GLD, you'll find some cheaper alternative silver ETFs out there, including the roughly $1 billion abrdn Physical Silver Shares ETF (SIVR). However, SLV is the runaway leader when it comes to trading volume and assets under management.
A word of warning when it comes to tax time, though. "ETFs backed by physical metals are also treated like collectibles from a tax perspective. In other words, if you hold for more than a year, you still don't enjoy the advantaged long-term capital gains rate, which tops out at 20% – instead, you pay a collectibles capital gains rate, which tops out at 28%," writes Kiplinger contributor Kyle Woodley in his feature on the best silver ETFs to buy. "Thus, tax-advantaged accounts like IRAs are the best investment accounts for holding these kinds of funds."
abrdn Physical Precious Metals Basket Shares ETF
- Assets under management: $948.0 million
- Expenses: 0.60%
Can't decide whether you like gold or silver better? Well, with the abrdn Physical Precious Metals Basket Shares ETF (GLTR, $86.53) from asset manager Aberdeen, you don't have to decide.
The investment objective of GLTR is to provide a single-stop exposure to physical gold, silver, platinum and palladium bullion in one simple exchange-traded product. It is admittedly weighted more toward gold than anything else at present, with over half of assets in this precious metal and another fifth or so in silver. However, investors who want a cost-effective and convenient way to invest in physically backed precious metals have to just hold this one position and cover all four bases.
Shares are up roughly 5% in the past 12 months thanks to this diversified approach to physical precious metals, and are up more than 50% over the last five years.
And perhaps best of all, there's no reason to worry about storage at home in a safe or the difficult task of lugging around bars to buy or sell them. GLTR keeps its goods in a secured vault in the U.K. that is inspected twice per year. This makes it easy to buy and sell precious metals with peace of mind and far less hassle, and is why GLTR is on this list of the best commodity ETFs.
United States Natural Gas Fund
- Assets under management: $1.3 billion
- Expenses: 1.06%
The United States Natural Gas Fund (UNG, $6.71) is a commodity ETF designed to track natural gas prices instead of oil.
The intricacies of UNG matter a lot if you want to know how it follows (or at times differs from) the day-to-day movements in natural gas markets. UNG is linked to the price of Henry Hub natural gas futures contracts traded on the NYMEX. What is crucial to understand, however, is that right now the fund only owns gas futures for October 2023 delivery. That means more exposure to near-term price trends – as well as a more active product that is forced to roll over funds more frequently.
Admittedly, this leads to a steep cost structure that is 10 times some of your typical equity index funds. However, the United States Natural Gas Fund is really the only viable natural gas ETF that trades in the U.S. The rest are either very small with just a few million dollars in assets or they are aggressive inverse or leveraged funds.
After rising to a 14-year high in August 2022, natural gas prices have rolled back sharply in recent months – causing UNG's share price to fall roughly 75% over the past 12 months. Still, tight global gas supplies are predicted to persist for some time, which could create tailwinds for this fund down the road.
United States Oil Fund
- Assets under management: $1.5 billion
- Expenses: 0.60%
The sister to UNG is the United States Oil Fund (USO, $78.30). This exchange-traded product is designed to reflect the price of West Texas Intermediate crude oil. USO gives regular folks an easy way to gain exposure to this key energy commodity.
However, similar to the United States Natural Gas Fund, USO is a complicated investment product, and investors should understand how it works before buying in. Though benchmarked to WTI, it's not as simple as just bringing up the price of oil and then expecting this fund to move on a 1-to-1 basis.
USO allocates about 90% of its assets across futures contracts that come due in the next six months, and about 20% in the "front month" that is next in line. As the old futures contracts mature, it "rolls" the funds into longer-dated contracts to keep the exposure in roughly this same balance over time.
There is obviously a bit of friction here based on the cost structure, and divergence can and does happen between short-term and long-term price trends. But if you want a popular and simple way to play oil prices, then this commodity ETF is worth a look.
Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF
- Assets under management: $5.4 billion
- Expenses: 0.59%
The name says it all with the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC, $15.03). This exchange-traded fund is benchmarked to a basket of physical commodities to provide diversified exposure to raw materials. And it does so in a way that avoids the sometimes onerous K-1 tax forms that you can sometimes get when investing in futures markets.
If you're unfamiliar, a K-1 is required for any investment that functions as a partnership – which, believe it or not, can apply to many publicly traded stocks or exchange-traded products. And when you invest in a partnership, you are taxed instead of the entity itself, and therefore have to reflect your share of the investment's earnings, losses, deductions, credits and various other items on your personal returns each April.
With its simplified paperwork and a portfolio made up of futures contracts on 14 heavily traded commodities across the precious metals, industrial metals, energy, and agriculture sectors, it's no surprise PDBC is one of the most popular commodity ETFs on Wall Street.
First Trust Global Tactical Commodity Strategy Fund
- Assets under management: $2.8 billion
- Expenses: 0.95%
Another popular and diversified commodity fund that forgoes K-1 tax forms is the First Trust Global Tactical Commodity Strategy Fund (FTGC, $24.58). This offering is similar to the aforementioned Invesco fund, but it differs in that it takes a more tactical approach to commodity markets based on what materials the fund's managers think are hot right now.
At the moment, that means a bias away from energy commodities like crude oil and gasoline that are at the top of PDBC's portfolio. Instead, it has more than 42% of the portfolio allocated towards agricultural commodities.
If you're interested in playing the continued inflationary pressures we're seeing, then FTGC is one of the best commodity ETFs to do so, and in a more active way. While energy products appear to be stabilizing after a rough start to the year, this First Trust fund may have something to offer if and when the interest moves away from this sector and into other areas of commodity markets.
Invesco DB Agriculture Fund
- Assets under management: $841.9 million
- Expenses: 0.91%*
Investors who want one of the best commodity ETFs that provide a cost-effective and convenient way to invest in agricultural commodity futures should take a closer look at the Invesco DB Agriculture Fund (DBA, $21.85). This is an important distinction that sets DBA apart from for-profit food and consumer staples stocks, as investors are getting direct exposure to the raw materials themselves rather than the corporations that rise and fall based on how they manage their input costs.
The fund is diversified across products that include soybeans, cattle, sugar, corn and wheat, with no single agricultural commodity representing more than 18% or so of the portfolio at present.
DBA is up about 8% for the year-to-date as inflationary pressures remain. And while food inflation continued to moderate in the July CPI report, it was still up a burdensome 4.9% on a year-over-year basis. Plus, pockets of high inflation remain, including in commodities such as sugar, cocoa and potatoes, says CFRA Research analyst Arun Sundaram. This makes DBA worth a close look as it has proven to be an effective hedge against rising prices.
While more expensive than your typical Nasdaq or S&P 500 fund, the wide exposure across 10 different agricultural products comes at a reasonable cost for those who don't have the time or inclination to manage a diversified portfolio of ag futures contracts on their own.
* Includes 0.06% estimated futures brokerage fee
iShares GSCI Commodity Dynamic Roll Strategy ETF
- Assets under management: $822.6 million
- Expenses: 0.48%
Last but not least is the iShares GSCI Commodity Dynamic Roll Strategy ETF (COMT, $29.04). This is another one of the diversified and tactical commodity ETFs, deploying a "dynamic roll" strategy. In other words, rather than rotating out of each futures contract based on a fixed calendar, COMT instead assesses the market conditions and seeks the best pricing opportunity.
Remember, the commodity funds featured here don't have a warehouse that store gold bars or oil barrels. Rather, they invest in commodity futures – and as the name "futures" implies, these are contracts that eventually come due at a fixed point in the future. So if you want to maintain your position you have to exit before the expiration date, and "roll" that investment into a longer-dated contract.
This is where COMT adds value, with a strategy that maximizes profits during this process rather than simply being a victim of expiration. It's a subtle but important difference. And as the icing on the cake, it does so without an overly costly strategy, offering one of the lower fee structures among commodity funds.
Jeff Reeves writes about equity markets and exchange-traded funds for Kiplinger. A veteran journalist with extensive capital markets experience, Jeff has written about Wall Street and investing since 2008. His work has appeared in numerous respected finance outlets, including CNBC, the Fox Business Network, the Wall Street Journal digital network, USA Today and CNN Money.
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