The stock market has put up tremendous performance across 2024, and the election of Donald Trump has reduced some political uncertainty in the U.S. But some investors still look ahead with a sense of unease amid a complicated change in interest rate markets that's underway and continued geopolitical unrest abroad. Others remain concerned about sticky inflation. And this is where commodity ETFs come in.
In times of uncertainty and elevated volatility, many investors turn to hard assets to hedge against potential threats to their portfolios.
When stocks prove disappointing, investors often look to alternative assets for opportunities rather than simply muddling through via blue chip stocks. And history shows commodities have proven resilient amid persistently rising prices.
These commodity exchange-traded products provide simple exposure to hard assets like gold, copper, crude oil, sugar, and other goods via futures contracts.
They provide more direct exposure than for-profit companies that deal in these goods, as futures are tied to the raw materials themselves.
Inflation and uncertainty remain elevated
The U.S. inflation rate peaked at 9.1% in June 2022 and ran at a 4.1% clip in 2023. And though the October Consumer Price Index (CPI) report showed the headline inflation rate had cooled to 2.6%, that's still well above the Federal Reserve's long-term 2% target.
"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.
U.S. Treasury yields reflect a complex macroeconomic picture. Since the Fed started cutting interest rates in September, the yield on the 10-year U.S. Treasury note has actually risen by more than 75 basis points.
The 10-year climbed steadily higher heading into the U.S. presidential election, as investors weighed potential policy outcomes, including the imposition of new tariffs in the event Donald Trump reclaimed the White House.
That trend stalled on November 19, when President Vladimir Putin lowered the threshold for Russia's use of nuclear weapons. But Trump's tariffs are the critical variable.
"The verdict is still out on this issue," writes Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, "and it is unlikely to be met with any meaningful conclusion until we're well into the New Year and investors are offered more concrete details on the ways in which Trump chooses to address global trade via his preferred method of tariffs."
Why should you invest in commodity ETFs?
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 five 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 with assets under management of at least $150 million, with daily trading volume of more than 100,000 shares, and with 100% of holdings in hard assets and/or futures, not equities.
And all five commodity ETFs provide a simple one-stop way to invest in your normal brokerage account.
Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF
- Assets under management: $4.5 billion
- Expenses: 0.59%, or $59 annually for every $10,000 invested
The Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC) is the largest commodity-focused ETF out there, and there's a good reason for its popularity. This exchange-traded fund provides investors a diversified basket of commodity contracts without the hassle of opening up a futures-trading account.
And – as its name indicates – this ETF avoids the dreaded K-1 tax forms that many investors and accountants loathe deciphering and instead adheres to standard capital gains rules.
Fossil fuels lead the portfolio, with gasoline and various crude oil contracts representing almost half of all assets at present. That's in large part because these energy commodities are the most liquid and popular products out there and represent a big chunk of the future market in general.
But you'll also see sizable holdings in gold, copper, wheat and zinc to round out this reasonably diversified commodity ETF.
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First Trust Global Tactical Commodity Strategy Fund
- Assets under management: $2.2 billion
- Expenses: 1.02%
The first thing you might notice about the First Trust Global Tactical Commodity Strategy Fund (FTGC) is the elevated expense ratio that charges a much higher rate than your typical index fund.
That’s because FTGC embraces the word "tactical" in its name, with an actively managed approach that simply takes more work and expense.
For instance, right now top holdings include precious metals gold and silver, and less popular agricultural commodities such as sugar and coffee also appear near the top of the list. As a result, FTGC has managed to tally a modest gain so far this year.
There is no guarantee that this active approach will add up to future outperformance, however, so investors should look carefully at the current approach and market trends considering that FTGC is significantly pricier than its peers.
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iShares Gold Trust
- Assets under management: $34 billion
- Expenses: 0.25%
Though not the largest gold-backed ETF on Wall Street – that crown belongs to the SPDR Gold Shares ETF (GLD) – this fund from iShares is still among the most liquid and cost-effective ways to gain exposure to the precious metal.
In fact, iShares Gold Trust (IAU) shares all the same benefits of its larger competitor by being 100% linked to gold bullion prices without requiring the costly insurance or storage that comes from owning physical gold bars. This notable difference means IAU undercuts GLD significantly on expenses.
With gold prices soaring, this fund has tacked on an impressive gain of roughly 40% year to date to top even the brisk performance of the S&P 500 Index of large-cap stocks. There are a host of reasons for this, from geopolitical uncertainty to changing central bank policies that could weaken the dollar or potentially spark inflation in the months ahead.
Together, it has made a compelling case for investment in gold. And if you want to play the commodity directly instead of gold mining stocks, IAU is one of the best options out there right now.
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United States Copper Index
- Assets under management: $180 million
- Expenses: 1.04%
It's not as flashy as precious metals like gold and silver, but copper prices have been glittering just as bright lately. For instance, copper futures pricing hit its highest-ever level on May 20 and remains around multi-year highs.
As a result, the United States Copper Index (CPER) ETF has moved from an obscure niche fund into a more popular vehicle for investors who want exposure to this key commodity without trading futures themselves.
This exchange-traded commodity fund is composed of copper futures contracts that mature within the next several months. Fund managers "roll" those futures contracts on a regular basis to ensure the portfolio is always looking ahead to copper’s short- and medium-term movement.
This strategy is a bit complex, and it drives up costs as a result. But investors are hard-pressed to find a better commodity ETF to play copper than CPER.
Learn more about CPER at the USCF Investments provider site.
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United States Oil Fund
- Assets under management: $1.4 billion
- Expenses: 0.70%
Crude oil is the most actively traded commodity in the world. And if you're looking to play short-term moves in the oil market via an established commodity ETF, the United States Oil Fund (USO) is the leading choice.
USO is focused on the "front month" contract for West Texas Intermediate crude. It's not a direct, 1-to-1 link to day-to-day fluctuations you'll see in the global crude oil market, as there are other contracts out there such as Brent crude, which is based on output from the North Sea in Europe. But the duration is laser-focused on where futures will go next.
This product is not to be confused with its sister fund, the United States 12 Month Oil Fund LP (USL), which holds futures contracts spread across the next 12 months rather than just the upcoming month. That commodity ETF is an interesting longer-term option in theory, but with less than $100 million in assets it can be illiquid and carries elevated risks.
That means investors looking to play energy markets via crude oil futures may want to stick with USO, which provides an established near-term investment vehicle that is hard to match outside of direct investment in oil futures.
Learn more about USO at the USCF provider site.
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