Commodity ETFs

About Commodity ETFs

Commodities are an inflation hedge and a portfolio diversifier, and they produce no income while you wait. A bar of metal pays no dividend and has no earnings, so the entire return has to come from the price going up. That makes them a tactical allocation for most people rather than something to hold forever.

How the fund gets its exposure matters enormously and catches people out constantly. Funds holding the physical material track the spot price cleanly. Funds holding futures have to sell each contract before it expires and buy the next one, and when the next contract costs more than the expiring one that roll bleeds value continuously. Several well-known oil and gas funds have lost most of their value over the years while the commodity itself was roughly flat, entirely through the roll.

Funds holding producers rather than the material are a third thing again. A miner or driller has fixed costs, debt and management, so it amplifies the commodity move in both directions and brings company risk along with it. If you want the commodity, buy the commodity, and check whether the fund holds the material, futures on it, or shares in the companies digging it up.

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