There are a lot of commodity ETFs. We show you the best commodity ETFs and show you the 6 important requirements for picking a good commodity ETF.
We have thoroughly researched 24 commodity ETFs and found what we consider the best one suited for most people.
So what is the best commodity ETF?
The best commodity ETF for most people is: iShares GSCI Commodity Dynamic Roll Strategy ETF. Symbol: COMT
There are other commodity ETFs available, but there is really only a handful that is worth considering.
- Why you should choose iShares GSCI Commodity Dynamic Roll Strategy ETF
- What is the historical return of commodities?
- What is commodities?
- What are some of the holdings of a commodity ETF?
- What other commodity ETFs should you consider?
- How do I know if an ETF is a commodity ETF?
- Why should I buy commodities?
- Can I hedge against inflation with commodities?
- How do I build a great portfolio with ETFs?
- Related questions
When you pick a good commodity ETF you need to look at 6 things:
- The expense ratio for the ETF needs to be low. The expense ratio is always expressed as a percentage. The percentage denotes how much of your total investment in that ETF that you need to pay the provider. This should be below 0.30% and preferrably lower than that.
For commodity ETFs the expense ratio is usually a bit higher. This is because commodity ETFs buy futures contracts on the commodities that the ETF wants to gain exposure to. Buying futures contracts is more expensive than buying stocks.
- The ETF should invest passively. It should follow a well-established index from a reputable provider like MSCI, Morningstar, or FTSE. Passivly managed funds typically beats actively managed funds on expenses and investment returns.
- The ETF needs to be highly liquid. This means that the difference between the buy and sell price (bid/ask) for the ETF is small. This is called the price spread.
- The ETF needs to have large amount of assets under management. This is abbreviated as AUM. This guarantees that the ETF doesn’t close in the near future and is also an indicator of low price spreads.
- The ETF needs to follow its index without a large tracking error. If the ETF has a large tracking error in comparison to its index we are not getting what we are paying for. A large tracking error is also an indication that the ETF is executing poorly on its replication of the index that it is tracking which is not desireable.
- The index that the ETF tracks need to represent and replicate the desired asset class with high fidelity. This means we expect a commodity ETF to contain a broad basket of commodities and continue to do so without style drift.
When you are comparing the six requirements to each other the most important thing to focus on is the expense ratio, as that is the most reliable indicator of how well the ETF will perform in the future.
The iShares GSCI Commodity Dynamic Roll Strategy ETF fulfills all of the above requirements. It is cheaper than most other commodity ETFs and tracks a commodity well regarded broad commodity index with little tracking error. It is highly liquid with a large AUM.
What is the historical return of commodities?
Here is the historical return of the commodity asset class.
|Periode||Commodities return (%)|
|CAGR since 1989||0.95|
|CAGR 10 years||-7.92|
|CAGR 5 years||1.04|
|CAGR 3 years||-2.85|
Here is how you read the table.
CAGR stands for Compound Annual Growth Rate. It is the rate of the return with included interest on interest. It includes reinvestment of dividends.
CAGR Since 1989 is the return since 1989. This is the year which we have chosen, as we have had reliable data for most asset classes since 1989.
CAGR 10 years is the return for the past 10 years, not including the current year.
CAGR 5 years is the return for the past 5 years, not including the current year.
CAGR 3 years is the return for the past 3years, not including the current year.
Last year is the return for the asset class last year.
Return YTD is the Year To Date return for the asset class.
What is commodities?
Commodities are raw materials. Commodities are the basic building blocks that are used in manufacturing and production for all other industries.
At the most basic level commodities include oil-related products, livestock, basic metals like lead, precious metals like gold, and agricultural produce.
Commodities as an asset class group many commodities together to create a pool, so that when you buy a commodity ETF you are exposed to many different commodities. This is what you want.
The Goldman Sachs Commodity Index (GSCI) is a widely used index. It includes exposure to 24 different commodities.
Commodities are most often traded as futures. A future is a contract to buy a certain commodity in the future at a predetermined price.
There are commodity ETFs that are backed by physical materials. These include gold ETFs.
What are some of the holdings of a commodity ETF?
Here are the holdings of the Goldman Sachs Commodity Index (GSCI) as of 2020. The DB Commodity Index is also a popular index that holds slightly fewer commodities.
|Commodity Name||Weight in index|
|WTI Crude Oil||25.31%|
|Brent Crude Oil||18.41%|
When you buy the iShares GSCI Commodity Dynamic Roll Strategy ETF you become the owner of a broad basket of commodities.
Over 60% of the GSCI Commodity consists of energy-related products. This is followed by industrial metals at 10.6%, precious metals at 4.5%, agricultural products at 15.8%, and livestock at 7.25%
What other commodity ETFs should you consider?
There are many commodity ETFs. In addition to the requirements listed above, you need to keep a keen eye on the index that the ETF is tracking.
In the table below we have listed what we consider some good alternatives to iShares GSCI Commodity Dynamic Roll Strategy ETF.
|iShares GSCI Commodity Dynamic Roll Strategy ETF||S&P GSCI Dynamic Roll Index||0.48||COMT||iShares|
|iShares Gold Trust||Physical Gold store in vaults||0.25||IAU||iShares|
|Invesco DB Commodity Index Tracking Fund||DBIQ Optimum Yield Diversified Commodity Index||0.88||DBC||Invesco|
|Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF||Proprietary (Active)||0.59||PDBC||Invesco|
How do I know if an ETF is a commodity ETF?
When you select an ETF to cover the commodity asset class you can clearly see which style the ETF uses by the name of the ETF.
Here are two examples:
• iShares GSCI Commodity Dynamic Roll Strategy ETF commodities ETF
• Invesco DB Commodity Index Tracking Fund
As you can see the ETFs clearly state the investing strategy of the ETF. In this case, it is commodities that the ETF is buying.
In addition to this, you need to examine the index that the ETF is tracking. Most index providers disclose their indexing methodology on a general level and even on a practical specific level for particular assets classes.
The large index providers have money on the line in providing the best indices for any one asset class. This means that we can typically rest assured that their methodology is far superior to any second-guessing that we as private investors may come up with.
For commodities, there are many different ways to construct an ETF. In the past 5 – 10 years we have seen many new commodity ETFs being launched with various ways of constructing an index.
One of the largest headwinds to a commodity ETF is the use of futures, swaps, or options to gain exposure to a commodity. These are called derivative products because their prices are derived from another asset. They need to be renewed regularly (rolled over) which costs money.
In addition to this, commodities can also be taxed differently than equities or bonds.
Why should I buy commodities?
Commodities experience some wild boom and bust cycles.
This is because at the start of a boom cycle mining producers ramp up their production to meet the production requirements of produces further down the value chain. Commodity prices are usually increasing in price at this stage.
When we reach the top and start of the decline of the economic cycle the commodity producers are at full capacity and many are expanding their production capabilities to meet demand, but that’s exactly when commodity prices will begin to stagnate.
As the economic cycle continues its downward trend demand weakens for commodities and prices fall even further. At this stage, commodity producers scale back their production levels but nowhere near fast enough to prevent the markets to be oversaturated with commodities. Commodity prices plummet marking the start of the bust cycle.
If you can catch the commodities asset class at the right time you stand to increase your wealth significantly.
We track 67 asset classes with data going back to 1989. Commodities have been the worst-performing asset class since 1989. This is important to have in mind when constructing your portfolio.
The best portfolios that we have benchmarked exclude commodities entirely from their selection.
Can I hedge against inflation with commodities?
No, based on our data of 67 asset classes going back to 1989 commodities as an asset class have not been a good hedge against inflation.
It has performed significantly worse than other asset classes.
We have data going further back to 1970 when the GSG commodity index was established. From 1970 to 2021 have gained some 5% compound annual growth rate versus equities’ 10.4% compound annual growth rate
How do I build a great portfolio with ETFs?
A high-performing portfolio is constructed by combining different asset classes. If you just want the market return you should buy one ETF (VTI). You don’t need anything else.
If you want a shot at outperforming the market you need to apply the following recipe to your investing strategy.
- Start with adding a broad US based stock ETF.
- Then, add exposure to international stocks. This is usually divided into developed countries and emerging markets. Developed markets include Europe, Canada, Japan, Australia and small parts of Asia. Emerging markets include Eastern Europe, Africa, most of Asia and Southamerica.
- Then tilt (overweight) your portfolio towards high performing asset classes like value and small-cap. Value stocks and smaller stocks have historically outpaced larger growth stocks. This has not been true in the past 10 years however.
If you want the best performing, pre-made, and benchmarked portfolios that we have tested then you should consider our premium service that shows you how to construct the best portfolios that we have benchmarked.
What is a good gold ETF?
The best gold ETF is iShares Gold Trust (IAU). It buys and stores physical gold in vaults around the world.
What is the best ETF that tracks oil?
The best ETF that tracks the price of oil is United States Oil Fund LP (USO). It buys short-term NYMEX futures contracts on WTI crude oil.