Commodity exchange-traded funds (ETFs) provide exposure to metals, energy, and agricultural products without the hassle of direct ownership. While gold and silver can be stored, commodities like oil, natural gas, and wheat are harder to hold physically, making ETFs a practical alternative.
These funds offer diversification thanks to their low correlation with stocks and bonds and can act as a hedge against inflation, since commodities often rise in value when prices increase. They're also fairly volatile, influenced by supply and demand, geopolitical events, and economic conditions.
Top commodities ETFs to consider
For this list, we screened for ETFs that provide exposure to a range of commodities rather than a single asset like gold or oil. We also prioritized funds that don't require a K-1 tax form, which is commonly issued by partnership-structured ETFs and can complicate tax filing compared to a standard 1099.
1. Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC)
The Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC -0.88%) tracks the DBIQ Optimum Yield Diversified Commodity Index Excess Return, providing exposure to 14 heavily traded commodities across energy, precious metals, industrial metals, and agriculture. The fund includes gasoline, Brent crude, NY harbor ULSD, WTI crude oil, natural gas, gold, corn, soybeans, wheat, sugar, zinc, aluminum, copper, and silver futures.
What sets this Invesco ETF apart is its optimum yield strategy, which helps manage roll yield -- the impact of replacing expiring futures contracts with new ones. By selecting contracts with the best price curve positioning, the fund aims to reduce the negative effects of contango, where later-dated futures contracts are more expensive than near-term ones, eroding returns over time.
With an expense ratio of 0.59%, the fund is fairly affordable for a commodity ETF. However, it's not the most tax-efficient choice, since it tends to pay large capital gains distributions in December that can lead to unexpected tax liabilities for investors in taxable accounts.
Should you invest in commodities ETFs?
There are two primary ways to use commodity ETFs. The first is as a trading tool, actively speculating on price movements. This requires daily monitoring and a strong understanding of commodity cycles, as prices can be highly volatile.
The second is for diversification, typically a roughly 20% allocation that is rebalanced periodically. Because commodities have low correlation to stocks and bonds, they can help stabilize a portfolio during inflationary periods or market downturns. In 2022, for example, commodities rallied while both stocks and bonds declined.
The main risks are volatility in both directions and tax inefficiency. Many commodity ETFs rely on futures contracts that generate large end-of-year capital gains distributions, which can be a drag for investors in taxable accounts.
For those who understand the risks and market drivers, commodity ETFs can be a useful portfolio tool, but they warrant careful consideration before investing.
