Commodities are basic goods used as inputs in the economy that provide investment opportunities and may be used as a store of value and a hedge against 澳洲幸运5开奖号码历史查询:inflation. Commodities are an asset class typically 澳洲幸运5开奖号码历史查询:negatively correlated with other asset classes, such as stocks and bonds. When stocks and bonds decrease in value, commodities will increase, and vice versa.

Commodities, like precious metals, offer inve🍌stors a way to diversify t𒊎heir investment portfolio. Commodity ETFs give ordinary investors easy and inexpensive access to various commodities markets.

Why Invest in Commodity ETFs

澳洲幸运5开奖号码历史查询:Commodity ETFs enable investors to gain exposure to individual commodities or baskets of commodities in a simple, relatively low-risk, and cost-effective manner. Numerous ETFs track commodities, 澳洲幸运5开奖号码历史查询:including base metals, precious metals, energy, and 澳洲幸运5开奖号码历史查询:agricultural goods, with wh🌺ich investors can design their ideal commodity exposure.

A commodity ETF usually focuses on a single commodity, holding it in physical storage or on investments in 澳洲幸运5开奖号码历史查询:futures contracts. Other commodity ETFs track the performance of a 澳洲幸运5开奖号码历史查询:commodity index that includes dozens of i✅ndividual commodities through a combination of physical storage and derivatives positions.

Types of Commodity ETFs

Four different types of commodity ETFs can meet an individual investor’s investment goal꧟s, risk tolerance, and cost tolerance:

• Equity ETFs that invest in commodity-related stocks
• 澳洲幸运5开奖号码历史查询:Exchange-traded notes (ETNs)
• Physically backed funds
• 澳洲幸运5开奖号码历史查询:Futures-based funds

Equity Funds

Equity-based commodity ETFs hold stock in🐎 companies that prod꧋uce, transport, and store commodities. An equity-based commodity ETF exposes investors to multiple companies or specific sectors but in a simple, inexpensive manner rather than buying the underlying company.

Equity funds can be a safer way to gain exposure, minimizing the risks associated with physical and futures commodity ETFs. This passive investing and economies of scale may also provide lower 澳洲幸运5开奖号码历史查询:expense ratios. However, investing in equity fu💫nds adds a layer between the 🐈investor and the commodity.

Exchange-Traded Notes (ETNs)

An exchange-traded note (ETN) is a debt instrument issued by a bank. It is an 澳洲幸运5开奖号码历史查询:unsecured debt that has a 澳洲幸运5开奖号码历史查询:maturity date and is backed by the issuer. ETNs seek to match the returns of an underlying asset, and they do so by employing different strategies, inclu🐼ding buying stocks, bonds, and options.

The advantages of ETNs are that there is no 澳洲幸运5开奖号码历史查询:tracking error between the ETN and the asset it is tracking, and they receive better tax treatment because an investor only pays regular 澳洲幸运5开奖号码历史查询:capital gains when sold. The main risk involved with ETNs is the credit quality of the issuing institution.

Physically Backed Funds

Physically backed ETFs hold physical commodities and are limited to precious metals. The advantage of a physical ETF is that it owns and has possession of the commodity. This removes both tracking and 澳洲幸运5开奖号码历史查询:counterparty risk. Tracking risk occurs when the ETF fails to provide th𝓰e same returns as the asset it is supposeꦇd to track. Counterparty risk is the risk that the seller does not actually deliver the commodity as promised.

The disadvantage of physically backed ETFs is the costs of delivering, holding, storing, and insuring physical commodities. The avoidance of these costs is what often pushes investors to buy commodity futures instead. 澳洲幸运5开奖号码历史查询:Physical precious metal ETFs are taxed as collectibles, which means capital gains are taxed at the investor's 澳洲幸运5开奖号码历史查询:marginal tax rate. Short-term gains are taxed at ordinary income rates.

Futures-Based Funds

These ETFs build a portfolio of futures, forwards, and swap contracts on the underlying c♎ommodities. The advantage of a futures-based ETF is that ꧑the ETF is free of the costs of holding and storing the underlying commodity.

Most futures-based commodity ETFs pursue a “澳洲幸运5开奖号码历史查询:front-month” roll strategy where they hold “front-month” futures, or the futures closest to expiration. The ETF must replace those futures before they expire with the second-month (the sꦆubsequent month) futures. This strategy closely tracks the current, or spot, price for the commodity. However, the ETF is exposed to “rolling risk” as the expiring front-month contracts are “rolled” into the second-month contracts.

The majority of futures-based commodity ETFs are incorporated as 澳洲幸运5开奖号码历史查询:limited partnerships. For tax purposes, 60% of the gains are taxed as long-term capital gains, and the remaining 40% are taxed at the investor’s ordinary tax rate. The LP’s gains are marked to market at the end of the year, which may create a taxable event for an investor, even if they haven’t sold any of their shares in the ETF.

Risks of Commodity Investment

Commodity markets are usually in one of two different states: contango or 澳洲幸运5开奖号码历史查询:backwardation. When futures are in contango, prices for a particular future are higher in the future than in the present. Futures in backwardation show that prices for a commodity are higher now than in the future. Some commodity ETFs pursue strategies designed to avoid the risks posed by a market that is in contango.

In contango, the rolling risk is “negative,” and a commodity ETF sells lower-priced futures that are expiring and buys higher-priced futures, which is known as “negative roll yield.” The cost of adding higher-priced futures reduces returns and acts as a drag on the ETF, preventing it from accurately tracking the spot price of the commodity. When a futures market is in backwardation, the rolling risk is “positive.” An ETF will be selling higher-priced futures that are expiring and buying lower-priced futures, creating a “positive r💖oll yield.”

Investment Strategies and Expenses

A laddered strategy uses futures with multiple expiry dates, where not all the futures contracts are replaced simultaneously. An optimized strategy chooses fu𒐪tures contracts that have the mildest contango and the steep🌄est backwardation in an attempt to minimize costs and maximize yields.

Both of these approaches may be suited for lꦅong-term risk-averse investors as they reduce costs but at the e💦xpense of tracking and potentially benefiting from short-term moves in the price of the underlying commodity. Futures-based commodity ETFs incur higher expenses due to the constant rollover of futures contracts.

ETFs may influence futures prices due to their need to buy or sell large numbers of futures contracts at predictable times, known as a “roll schedule.” This also places the ETFs at the mercy of traders who may bid prices up or down in anticipation of the ETF𝓀 trade orders. Finally, ETFs may be limited in the size of the commodity positions can take on due to com🍷modity trading regulations.

ETF Examples

Commodity ETFs track a wide range of underlying commodities, some of which include 澳洲幸运5开奖号码历史查询:precious metals, oil, and natural gas. Some commodity ETFs track a diversified basket of commodities. Precious metals like gold and silver are popular ETFs. The SPDR Gold Shares and iShares Silver Trust are ꦛ澳洲幸运5开奖号码历史查询:two of the largest gold and silver ETFs. The SPDR Gold Shares ETF has an expense ratio of 0.40%, and the iShares Silver Trust has an expense ratio of 0.50%.

A commodity ETF can invest in futures contracts of oil and natural gas. The SPDR S&P Oil & Gas Exploration and Production ETF has a diversified portfolio of oil- and gas-producing companies with an annual expense ratio of 0.35%.

Some investors can increase 澳洲幸运5开奖号码历史查询:diversification through diversified commodities ETFs. These ETFs, such as the iShares MSCI Agriculture Producers ETF, track the MSCI ACWI Select Agriculture Producers Investable Market Index.

The Bottom Line

Commodity ETFs provide commodity exposure for investors to diversify their portfolios. Many different types of commodity ETFs focus on various commodities, use different strategies, and have varying expense ratios. Investment depends on an individual's goals and risk tolerance. Commodity funds often create benchmark indexes that include only agricultural products, natural resources, or metals. As such, there is often 澳洲幸运5开奖号码历史查询:tracking error around broader commodity indexes like the 澳洲幸运5开奖号码历史查询:Dow Jones Commodity Index.