The Best Commodity ETFs to Watch
Passive investing through exchange-traded funds (ETFs) is all the rage now. There’s little not to like about what they have to offer. They’re as cheap as stocks, they rebalance often, they’re diversified into different sector’s stocks, and some even track a specific index to the tick. But, with so many to choose from, investors can get a little lost. My commodity ETF list seeks to help investors narrow their focus to the best, most liquid ETFs around.
The pressing question for many investors is: “Which ETFs should I own?” This depends on your investment strategy, timeline, risk tolerance, and other factors. Almost every type of commodity is available under the sun, from agricultural commodity ETF spot price trackers to precious metals and livestock. Let’s take a closer look at some important points of consideration.
What Are the Differences Between Commodity ETF Products?
First, many people wrongly assume a commodity ETF tracks the underlying spot price exactly. This is not the case for all products. Some ETFs track indexes correlated to the spot price, not the underlying asset. Performance slippage could be a concern in these instances.
For example, many ETFs track the futures contract price of the commodity and not the spot price itself. Futures prices are similar, but not identical. That’s because, unlike spot prices, futures prices are also impacted by something called the “futures curve.” This is essentially a snapshot of commodity prices at different expiry dates. If the slope of the futures curve is down, it means the market expects future price gains to be weak; vice versa for bullish curves. The spot price is not subject to future expectations, hence there’s no bias, as it only measures current prices.
This doesn’t mean investors should expect a commodity ETF to mirror spot price movement. Correlations between futures contracts and spot prices are still very strong. But investors shouldn’t lose sight of a futures curve skew. This is especially true for first-generation ETFs, which roll over expiring front-month contracts to the next month. Should the market go into contango, which are later-dated contracts priced lower than the front month, the contract will roll over into a less expensive contract when the present month expires. This would cause unneeded slippage to a portfolio’s returns.
Also, certain commodity ETFs hold a single underlying asset, while others carry blended assets. For example, United States Oil Fund LP (ETF) (NYSEARCA:USO) has a sole current holding of WTI Sweet Light Crude futures, whereas PowerShares DB Oil Fund (ETF) (NYSEARCA:DBO) tracks the DBIQ Optimum Yield Crude Oil Index Excess Return plus interest from U.S. Treasury security holdings. Performance of the two assets will be similar, but not identical.
Please read the individual ETF fact sheet or prospectus for exact information on tracking benchmarks.
ETFs vs. ETNs: What’s the Difference?
Although the exchange listing, trading fees, expense ratios, and other factors are similar, significant differences are evident.
The difference arises in the backing of the instrument itself. An ETF holds the underlying assets that it tracks. This could be the physical commodity itself, futures, or stocks. An exchange-traded note (ETN) is more like a bond or unsecured note from the issuer. As such, it doesn’t have the same underlying asset backing of an ETF and ,should the issuer go bankrupt, investors would lose all their principal. Therefore, stellar credit ratings of the issuer is a key consideration before purchase.
The big advantage of ETNs are their favorable tax status. Since ETNs don’t actually purchase physical commodities, investors don’t need to pay taxes until the derivative is sold. Assuming it’s held long enough, long-term capital gains are triggered, as opposed to short-term ones. Investors planning to hold for a longer term will definitely appreciate this advantage.
Commodity ETF List
Below are comprehensive lists of the most popular and liquid commodity ETFs on North American exchanges. Additional ETFs are available for public trade, however those not indicated on these lists are practically untradeable, as they lack sufficient volume.
Complete List Of Commodity ETFs
|Sector||Symbol||Commodity ETF Name|
|Gold||GLD||SPDR Gold Trust (ETF)|
|“||IAU||iShares Gold Trust(ETF)|
|“||DGL||PowerShares DB Gold Fund (ETF)|
|Gold (Leveraged and Inverse)||UGLD||Credit Suisse AG – VelocityShares 3x Long Gold ETN|
|“||UGL||ProShares Ultra Gold (ETF)|
|“||DZZ||DB Gold Double Short ETN|
|“||DGLD||Credit Suisse AG – VelocityShares 3x Inverse Gold ETN|
|“||GLL||ProShares UltraShort Gold (ETF)|
|Silver||SLV||iShares Silver Trust (ETF)|
|Silver (Leveraged and Inverse)||ZSL||ProShares UltraShort Silver (ETF)|
|“||USLV||Credit Suisse AG – VelocityShares 3x Long Silver ETN|
|“||DSLV||Credit Suisse AG – VelocityShares 3x Inverse Silver ETN|
|Platinum||PPLT||ETFS Physical Platinum Shares|
|Base Metals||DBB||Powershares DB Base Metals Fund (ETF)|
|Copper||JJC||iPath Bloomberg Copper Subindex Total Return Sub-Index ETN|
Food Commodities – Agriculture
|Sector||Symbol||Commodity ETF Name|
|Agriculture (basket)||DBA||PowerShares DB Agriculture Fund|
|“||JJG||iPath Bloomberg Grains Total Return Sub-Index ETN|
|“||RJA||AB Svensk Ekportkredit (Swedish Export Credit Corporation) ELEMENTS Linked to the Rogers International Commodity|
|Agriculture (Leveraged and Inverse)||DAG||DB Agriculture Double Long ETN|
|“||AGA||DB Agriculture Double Short ETN|
|“||ADZ||DB Agriculture Short ETN|
|Corn||CORN||Teucrium Corn Fund|
|Livestock||COW||iPath Bloomberg Livestock Total Return Sub-Index ETN|
|Soybean||SOYB||Teucrium Soybean Fund|
|Wheat||WEAT||Teucrium Wheat Fund|
|Sector||Symbol||Commodity ETF Name|
|Cocoa||NIB||iPath Bloomberg Cocoa Subindex Total Return SM IndexETN|
|Coffee||JO||iPath Bloomberg Coffee Subindex Total Return SM Index ETN|
|Cotton||BAL||iPath Bloomberg Cotton Subindex Total Return SM Index ETN|
|Sugar||SGG||iPath Bloomberg Sugar Subindex Total Return Sm Index ETN|
|“||CANE||Teucrium Sugar Fund|
|“||SGAR||iPath Pure Beta Sugar ETN|
|Timber||CUT||Claymore/Clear Global Timber Index (ETF)|
|“||WOOD||iShares S&P Global Timbr & Frstry Idx|
Best Commodity ETFs
The best commodity ETFs are the most liquid, and experience the least amount of slippage tracking the underlying asset. As mentioned, not all ETFs are created equal in this regard. Understanding the nuances of how each ETF trades does make a big difference over time.
Otherwise, what’s “best” for one’s portfolio is subjective. For example, long-term investors may want to hold an ETN over an ETF for preferred tax status considerations. Some investors may prefer the increased stability of a basket of commodities as opposed to individual commodities. Still, others may be conducting pairs of trading or hedging options positions. Every investor has their own unique considerations and goals unique to them.
Usually each commodity ETF subtype has a clear “go-to” listing. That is, an ETF that displays a dominant market position based on trading volume. For example, both SPDR Gold Trust (ETF) (NYSEARCA:GLD) and iShares Gold Trust(ETF) (NYSEARCA:IAU) have displayed consistent average daily trading volumes in the millions for a decade. However, some of the ETFs in the sector may struggle to obtain one-hundredth of that amount.
Unless there’s a specific reason to invest in a particular fund, it might be best to stick with the most liquid investment. When it’s time to sell, paying a one-penny spread is much better than paying a nickle. Given that preferred market participants can “see” an investor’s order a split second before it hits the exchange, the last thing an investor needs is poor order execution stemming from an algorithm pulling off the bid/offer and re-posting at a worse price. These types of antics can occur on illiquid products.
Should You Invest in Commodity ETFs?
ETFs are growing increasingly popular among the retail investing class. In fact, the popularity of ETFs versus individual stocks is rising significantly.
For example, seven of the top 10 most active securities in America in 2016 were ETFs. According to Credit Suisse Group AG (VTX:CSGN), ETF volume rose 50% over the past couple of years, while individual stocks only registered meager seven-percent gains. The evidence is showing that investors prefer the diversification that a basket of ETFs offers rather than being exposed to individual issue risk. This trend is poised to continue for the next several years. (Source: “Stocks Are No Longer the Most Actively Traded Securities in Stock Markets,” Bloomberg, January 12, 2017.)
There have been several studies showing how the proper diversification is key to generating returns that meet or exceed the broad benchmarks. ETFs provide the only way to achieve this in a low-cost, tax-efficient, and accurate fashion. Without them, investors would need to periodically re-weight their portfolios, and this poses the risk of human error while performing the calculations. Slippage is a major source of draw-down to amateur portfolios, and ETFs almost completely do away with this bugaboo.
ETFs also negate the need to make odd-lot purchases, while providing the convenience and peace of mind knowing that professionals are doing the work for you. That way, investors can spend more time analyzing which commodity ETF is right for them, and less time worrying about back-office accounting.
Since expense ratios are very reasonable (usually in the 0.40%–0.75% annual range, depending on the product), investors need not worry that undue fees are eating away at their returns. Many years ago, when mutual funds were the primary option for diversification, many investors chose to build their own portfolio because expense fees could range up to five percent per year. Fortunately, those days are long past.
ETFs have been called an investor’s best friend. While the list of commodity ETFs is long, investing in the most liquid ones could serve investors well, provided that their crystal ball is working correctly.