With inflation, conflict in Ukraine and the Middle East and rising rates dominating markets, investors have turned to alternative asset classes to gain returns. This is where a commodity exchange-traded fund (ETF) can help.
Commodities are generally inflation hedges because they move hand-in-hand with inflation. At the same time, commodity prices rarely follow stocks and bonds. If the price of a stock or bond is trailing down, this may be the time to buy commodities.
However, it can be difficult to know exactly which commodity to trade at any given time. Instead, many investors turn to commodity ETFs as a way to get exposure.
To help you get started with commodity ETFs, we prepared a few options to consider.
We looked at all ASX-listed ETFs tradeable in Australia that had exposure to commodities. We ranked them based on the best performance over the past 12 months (as of April 10, 2024), ranking the best-performing ETF first.
Below are the highest-returning commodity-themed exchange-traded products on the ASX, including all standard, synthetic and actively managed ETFs. We only included ETFs that tracked a physical commodity (including futures-based ETFs) and excluded ETFs that held company stocks.
To understand more about what these terms mean, head to our comprehensive guide on ETFs.
It's important to know that past performance is no guarantee of future success. The best-performing ETF of the last year might decline in value in the future. And commodities ETFs can be particularly volatile. The lesson here is that performance is one consideration, but you should also look at fees, how risky the product is, your investment goals and how long you can afford to invest for.
A commodity ETF looks to give you exposure to one of more physical commodities ranging from precious metals to agriculture and everything in between.
In most cases, it is not practical to directly invest in commodities. After all, if you're directly holding oil, you need somewhere to put it. This is highly expensive and would require a large minimum volume just to get started.
As such, these ETFs typically run based on futures contracts.
Instead of owning the asset themselves, they are exposed to the price of the assets. They aim to track the performance of the index without owning the product.
Your investment will depend on the futures position they have taken.
However, there are noticeable exceptions to this rule. With gold, some ETF providers will physically own gold and store it in a vault.
This is where things can get a little confusing for investors.
A commodity futures contract is an agreement to buy or sell a predetermined amount of a commodity at a specific price sometime in the future.
A futures contract has a specific end date that tells the seller when they have to deliver the assets.
The futures contract is named on the month it expires, so if you're trading in November then it's a November futures contract.
However, investors in futures contracts have no intention of taking ownership of the asset. Instead, they plan to buy an offsetting contract at a price that will make them money.
They are taking an educated opinion on the direction the price will go.
Commodity ETFs generally do not invest in the physical commodity itself. Instead, they invest the cash they hold and enter swap contracts with one or more counterparties. This is to gain exposure to the performance of futures contracts over the relevant commodity or commodities.
Commodity ETFs' main draw cards are that they are a hedge against inflation.
This is because the price of the underlying assets usually goes up with inflation.
In the current economic environment's rampant inflation, it is actually a good time to invest in commodity ETFs, especially if you believe inflation will remain high for some time.
If you're looking to get started investing in commodity ETFs, there are a few things you should consider.
The first is having a benchmark. How do you want the ETF to perform relative to the rest of the market? Given a commodity ETF is a thematic, it won't broadly track the entire ASX 200 so it can be used as a comparison.
The second factor to look for is the price of the ETF. After all, even a great share or ETF can be overvalued. Most investors start with a fund's expense ratio. Aim for as low as possible.
You should also watch for fees regarding your ETFs. This is known as drag, meaning you won't get the exact return of what you are tracking.
Finally, you should look at the liquidity of the fund. It is important to have a higher volume so you can sell the ETF if needed.
One of the main reasons to invest in commodities is that the price is highly correlated to inflation.
Commodity prices typically rise hand-in-hand with inflation, making them by default a hedge against inflation risk. At the same time, they have no strong correlation to other assets such as bonds and stocks.
This is why commodities are having a strong 2022/23 while the likes of shares and bonds have fallen.
If you're buying a commodities ETF, what you're buying is exposure to the underlying assets. As such, financial theory suggests you should buy precious metals and to a lesser extent industrial metals ETFs. These assets usually perform well during inflation.
If you're looking for precious metals ETFs, you could target the gold miners such as:
Important: The standard brokerage fee displayed is the trade cost for new customers to purchase $1,000 of either Australian or US shares. Where a platform charges different fees for both US and Australian shares we show the lower of the two. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, options or any specific provider, service or offering. It should not be relied upon as advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.
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