The Basics About Commodity ETFs

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You've heard a lot about commodity ETFs, but you need to really understand how they work before adding them to your portfolio. We've compiled the most frequently asked questions about commodity funds as well as a list of the available ETFs and ETNs on the current market.

What Is a Commodity ETF?

Commodity ETFs are great investment vehicles for investors who need to hedge risk or want to gain exposure to physical goods such as agriculture products, precious metals, and energy resources. However, the make-up of a commodity ETF is a little different than your normal ETF.

What’s in a Commodity ETF

Most ETFs consist of equities relating to a particular market index, sector, or region. A normal ETF is a collection ​of securities determined by the criteria of the fund. However, a commodity ETF is a little different.

Commodity ETFs are made up of futures or asset-backed contracts. These contracts represent the commodity and will track the performance of that particular product. However, the actual good is not in the ETF. For example, if you buy a Gold ETF, you are not buying an asset full of gold bars. You are buying an ETF consisting of assets backed by gold. Those bars of gold are still locked up in Fort Knox.

Why Buy a Commodity ETF

Are you bullish on a particular commodity like coal, oil, or gas? Or maybe you think there is a new innovation that will boost the usage of a particular commodity. The purchase of a commodity ETF may get your investment portfolio on the right side of that product.

Why Sell a Commodity ETF

Maybe your portfolio has foreign exposure. Does that country’s economy depend on a certain staple product like oil? Hedge your risk by selling that particular commodity ETF. Or you may feel adverse weather will negatively affect a certain commodity. Get on the bear side of that product by selling the appropriate commodity ETF.

Find a Commodity ETF Near You

If you’re still unsure whether a Commodity ETF is the right fit for your investment strategy, check out a few of the more popular commodity ETFs and see if they could work for your portfolio. Before you get started with ETFs, always conduct thorough research as you would with any investment.

So if commodities are where you want to be (investment wise), then research some of these funds and see if they are a fit for your portfolio. And while some of these funds may be attractive, be sure to conduct thorough research before making any trades. Check the history of the ETF, understand the risks, watch the fund in action, and see how it reacts to different market conditions. Also, take a look at what is in the funds as many ETFs may contain derivatives such as futures and options. And if you have any questions or concerns, be sure to consult a financial professional, such as a broker or advisor.

However, once you are comfortable with commodity ETFs, then it’s only a matter of calling your broker (unless you trade online). And once you do make your choice, then good luck with all of your trades.

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