Different Types of Commodity ETFs

Commodity exchange traded funds are a relatively recent investment option. The first funds were introduced in 2006. They quickly caught on with investors, and there are now over one hundred different commodity funds. It’s not difficult to imagine a future where there’s a commodity ETF to track every single type of futures contract. Current offerings span the entire range of commodities, from Energy and Metals to Livestock and Agriculture. Some funds track broad baskets of commodities, while others zone in on one particular type of futures contract. Lets take a closer look at the different kinds of funds available in the market today.

Commodity Index Funds

These funds invest in a commodity index or hold a diverse portfolio of commodity futures contracts. As of this writing, the most popular ETFs in this category (as judged by assets under management) are:

  • PowerShares DB Commodity Index Tracking ETF (DBC), which tracks the performance of a Deutsche Bank index, composed of futures contracts on 14 of the most important and heavily traded physical commodities in the world.
  • iPath Dow Jones UBS Commodity Index ETN (DJP), which tracks an index of 19 commoditiy futures.
  • iShares S&P GSCI Commodity-Indexed Trust ETF (GSG), which tracks an index of 24 commoditiy futures.
  • Elements Rogers International Commodity Index ETN (RJI), which tracks an index of 36 commodity futures.

While these 4 securities are all broad commodity index funds, the composition of their indexes varies significantly. DBC tracks the fewest commodities (14), while RJI tracks the broadest basket (36). The commodity category weighting also differs significantly. For example, DBC and GSG are heavily weighted towards Energy commodities (Oil & Gas), with weights of 56% and 69% respectively, while DJP and RJI allocate 34% and 44% to Energy. The allocation to Agricultural commodities varies from 15% (GSG) to 32% (RJI). Precious Metals range from 3.9% (RJI) to 17.5% (DJP). DBC doesn’t include Livestock commodities, while the other ETFs allocate as much as 6.4% to this category.

Investors seeking the broadest and most balanced commodity basket may want to choose RJI or DJP, whereas investors who care more about the relative importance of each commodity (as tracked by futures trading volume) should stick to one of the other ETFs.

Agriculture ETFs

This fund category includes ETFs that track one or more agricultural commodities such as corn, wheat, and soybean futures. The most popular agriculture ETF is PowerShares DB Agriculture Fund (DBA), which tracks commodities such as live cattle, soybeans, sugar, corn, coffee, cocoa, lean hogs, wheat, and others.

The iPath Dow Jones AIG Grains Sub-Index ETF (JJG) tracks only corn, soybeans, and wheat futures. The iPath Dow Jones UBS Agriculture Sub-Index (JJA) tracks a broader basket of 7 agricultural commodities: corn, soybeans, wheat, sugar, soybean oil, coffee, and cotton.

Individual agricultural ETFs include the Teucrium Corn Fund (CORN), iPath Dow Jones AIG Cotton ETN (BAL), iPath Down Jones AIG Sugar ETN (SGG), and many other ETFs which track individual agricultural commodities such as coffee, cocoa, and wheat.

There are also three Livestock funds, the most popular of which is the iPath Dow Jones-UBS Livestock Subindex ETF (COW).

Energy ETFs

Energy ETFs track oil and gas commodities and futures contracts such as crude oil, natural gas, gasoline, and heating oil. The most popular ETF in this category is the United States Oil Fund (USO), which tracks crude oil. Another widely held choice is the United States Natural Gas Fund (UNG). Other funds track a broader basket of Energy commodities. For example, the PowerShares DB Energy Fund (DBE) tracks gasoline, brent crude, heating oil, light crude, and natural gas.

Industrial Metals ETFs

ETFs in this category track industrial metals such as copper, tin, nickel, aluminum, lead, and others. Most investors will choose an ETF that tracks a diversified industrial metals basket, such as the PowerShares DB Base Metals Fund (DBB). But there are also ETFs that track a single industrial metal, such as the iPath Dow Jones AIG Copper ETN (JJC), and the iPath Dow Jones AIG Tin ETN (JJT).

Precious Metals ETFs

Precious metals ETFs have become very popular. For example, the SPDR Gold Trust (GLD) is now the second largest exchanged traded fund, with over 71 billion U.S. dollars under management. As a comparison, the most widely held ETF is the SPDR S&P 500 ETF (SPY), with 92 billion dollars under management. One interesting feature about GLD is that it invests in actual gold bars, unlike many other commodity ETFs which use futures contracts. GLD started trading in 2004, in the middle of an enduring gold bull market. An investor who purchased shares in 2004 would have enjoyed gains of over 250% within seven years.

Another popular choice is the iShares Silver Trust (SLV), which invests in silver bars. The price of silver has risen dramatically since late 2008. SLV shares increased from a low of $8.45 to over $48 by April 2011, a rise of 472%. Silver is a volatile commodity, not for the faint at heart. For example, in 8 months between August 2010 and April 2011, its price increased by 164%, followed by a precipitous drop of 43% in the subsequent 5 months.

Investors interested in participating in the broader precious metals markets can purchase a fund like the ETF Securities Physical Precious Metal Basket Shares (GLTR) which holds gold, silver, platinum and palladium. Or if you mostly care about tracking gold and silver, there’s the PowerShares DB Precious Metals Funds (DBP).

More recently introduced precious metals ETFs include the ETF Securities Physical Platinum Shares (PPLT) and Physical Palladium Shares (PALL).

Comments are closed.