Many investors are hesitant to buy individual commodities. But exchange-traded funds (ETFs) make commodities investing more accessible, opening the area up to a broader range of investors. Commodities can be a useful hedge against inflation, and they help diversify investment portfolios beyond more traditional stocks and bonds. Commodities such as silver and palladium also are seen as safe havens in times of market uncertainty, while demand for a commodity like copper may strengthen due to increasing manufacturing and construction activity.
Commodities ETFs offer a way to gain exposure to one or more commodities while reducing risks. Those risks include investing in just a single commodity or in dealing with the complexities of investing directly in commodities futures contracts.
Key Takeaways
- Commodities have dramatically outperformed the U.S. stock market in the past year.
- The commodities exchange-traded funds (ETFs) with the best one-year trailing total returns are UNG, UGA, and DBE.
- The first ETF holds natural gas futures contracts, the second holds gasoline-related futures, and the third holds a mix of oil and gas futures.
There are 55 commodities ETFs that trade in the U.S., excluding inverse and leveraged funds as well as those with less than $50 million in assets under management (AUM). These ETFs provide exposure to physical commodities, not commodity-producing companies.
Commodities, as measured by the Dow Jones Commodity Index, have significantly outperformed the U.S. stock market over the past 12 months. The index has delivered a total return of 27.5% compared with the S&P 500’s total return of -3.0%, as of Aug. 16, 2022. The best-performing commodities ETF for the fourth quarter (Q4) of 2022, based on performance over the past year, is the United States Natural Gas Fund LP (UNG). Note that the three top performing commodities ETFs for this quarter are all energy funds, which have been bolstered by the spike in fossil fuel prices due to surging demand and the ongoing war in Ukraine.
We examine the top three commodities ETFs below. All numbers are as of Aug. 16, 2022. In order to focus on the funds’ investment strategy, the top holdings listed for each ETF exclude cash holdings and holdings purchased with securities lending proceeds except under unusual cases, such as when the cash portion is exceptionally large.
- Performance Over One Year: 133.0%
- Expense Ratio: 1.11%
- Annual Dividend Yield: N/A
- Three-Month Average Daily Volume: 7,121,375
- Assets Under Management: $550.6 million
- Inception Date: April 18, 2007
- Issuer: Marygold Cos, Inc.
UNG is structured as a commodity pool, a private investment structure that pools investor contributions in order to trade futures and options in commodities. The fund provides exposure to natural gas prices by holding natural gas futures contracts. UNG aims to replicate the percent change on a daily basis of the price of natural gas delivered at the Henry Hub, Louisiana. It invests in front month futures contracts, meaning the futures contracts with the nearest expiration dates. This means the fund is more exposed to the adverse impacts of contango and is thus more appropriate for traders with a short-term strategy. It may also be appealing as an inflation hedge.
- Performance Over One Year: 64.0%
- Expense Ratio: 0.90%
- Annual Dividend Yield: N/A
- Three-Month Average Daily Volume: 105,839
- Assets Under Management: $104.1 million
- Inception Date: Feb. 26, 2008
- Issuer: Marygold Cos, Inc.
UGA is also structured as a commodity pool. It is designed to track the movements of gasoline prices. The ETF offers investors a way to bet on a rise in gasoline prices by investing in futures contracts on reformulated gasoline blendstock for oxygen blending (RBOB) and other gasoline-related futures. The fund may also invest in forwards and swap contracts. It provides investors with a way to implement a short-term tactical tilt toward a specific segment of the energy market and is not likely to appeal to those building a long-term, buy-and-hold portfolio.
- Performance Over One Year: 63.2%
- Expense Ratio: 0.77%
- Annual Dividend Yield: N/A
- Three-Month Average Daily Volume: 198,070
- Assets Under Management: $182.1 million
- Inception Date: Jan. 5, 2007
- Issuer: Invesco
Like the other two funds above, DBE is also structured as a commodity pool. It invests in futures contracts of some of the most heavily traded commodities in the world, including light sweet crude oil (WTI), heating oil, Brent crude oil, RBOB gasoline, and natural gas. Its goal is to track changes in the DBIQ Optimum Yield Energy Index Excess Return, which includes futures contracts on heavily traded energy commodities. The fund provides a cost-effective and convenient way for investors to gain exposure to futures of energy commodities. However, it may not be suitable for all investors, as the fund is focused on investments within highly volatile markets.
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