Moving Beyond Stocks and Bonds: The Power of Commodity ETFs

Investors looking to diversify their portfolios beyond the traditional mix of stocks and bonds are increasingly turning to commodity ETFs. These funds offer exposure to a wide range of commodities, from gold and oil to agricultural products, providing a unique hedge against inflation, economic uncertainty, and market volatility. Commodity ETFs are particularly valuable during periods of economic expansion, supply-demand imbalances, or rising inflation, as they tend to perform differently from stocks and bonds. By adding commodities to your portfolio, you can create a more resilient investment strategy that helps you weather market storms.

Why Invest in Commodity ETFs?

Commodity ETFs offer several key advantages for investors. First and foremost, they provide diversification. Unlike stocks and bonds, commodities often move independently of traditional asset classes, making them a powerful tool for reducing portfolio risk. For example, during periods of inflation, when consumer spending slows and corporate earnings falter, commodities like gold, oil, and industrial metals tend to increase in value. This offsetting behavior can help protect your portfolio from the worst impacts of market downturns.

Commodity ETFs are also relatively easy to invest in. Instead of buying physical gold, trading futures contracts, or storing barrels of oil, you can gain exposure to commodities through a single ETF. These funds are traded on major exchanges, just like stocks, and can be held in a standard brokerage account. This simplicity makes them accessible to investors of all experience levels.

Doug Greenberg, a principal wealth advisor with Pinnacle Wealth Advisory, emphasizes the importance of commodities during periods of inflation or economic uncertainty. "Commodities are highly cyclical and can be more volatile than stocks or bonds," he notes, "but they play a critical role in a well-balanced portfolio." Greenberg recommends allocating 1% to 3% of your portfolio to commodities, with a focus on energy, precious metals, industrial metals, and agriculture.

How Much to Invest in Commodity ETFs

While commodity ETFs can add significant value to your portfolio, they are not without risk. As Greenberg points out, commodities are highly cyclical, and their prices can swing dramatically in response to economic trends, policy changes, or geopolitical events. For this reason, it’s important to approach commodity investing with caution.

A 1% to 3% allocation to commodities is a good starting point for most investors. Within this range, the key is to be selective. Energy, precious metals, industrial metals, and agriculture are among the most promising areas of focus. Energy commodities, such as oil and natural gas, are particularly sensitive to economic activity, while precious metals like gold and silver have long served as safe-haven assets during times of uncertainty.

Criteria for Selecting Commodity ETFs

When evaluating commodity ETFs, there are several key criteria to consider. First, look for funds that offer a focused or diversified commodity strategy. Some ETFs specialize in a single commodity, such as gold or oil, while others provide broad exposure to a range of commodities. Diversified funds can reduce risk by spreading investments across multiple asset types.

Second, consider income-generating ETFs. Commodity prices can be highly volatile, and funds that distribute income regularly can help offset potential losses. Many commodity ETFs offer strong yields, often higher than those of traditional income-paying stocks.

Third, evaluate the fund’s performance over time. A three-year average annual return of 10% or more is a good indicator of a fund’s long-term viability. Finally, pay attention to expense ratios, as these can eat into your returns over time. While commodity ETFs tend to have higher fees than broad market funds, look for expense ratios below 1%.

Six Top Commodity ETFs to Consider

Based on these criteria, six commodity ETFs stand out as strong candidates for your portfolio. Each fund offers a unique combination of commodity exposure, income generation, and solid performance. Below is an overview of these funds, along with their strategies and key metrics.

1. WisdomTree Efficient Gold Plus Gold Miners Strategy Fund (GDMN)
   GDMN combines gold mining stocks with leveraged gold futures, providing comprehensive exposure to gold. The fund invests 90% of its assets in gold mining stocks, 10% in U.S. Treasuries, and uses leverage to amplify gold futures exposure. With a distribution yield of 7.14% and a three-year return of 17.15%, GDMN is an excellent choice for investors seeking gold exposure with income potential.

2. USCF Gold Strategy Plus Income Fund ETF (USG)
   USG invests in gold warrants and fully collateralized gold futures, generating income through the sale of call options. The fund has returned 14.62% annually over the past three years and offers a distribution yield of 7.01%. Its mix of gold exposure and regular income makes it a strong option for investors looking to hedge against inflation.

3. Invesco DB Agriculture Fund (DBA)
   DBA provides exposure to 10 agricultural commodities, including coffee, cocoa, corn, and live cattle. With a three-year return of 14.38% and an expense ratio of 0.92%, this fund is a solid choice for investors interested in the agricultural sector. Its focus on highly liquid commodities ensures strong performance during periods of rising demand.

4. USCF SummerHaven Dynamic Commodity Strategy No K-1 Fund (SDCI)
   SDCI invests in 14 equally weighted futures contracts, offering diversified exposure to commodities such as live cattle, coffee, copper, and natural gas. The fund has returned 14.35% annually over the past three years and distributes income semi-annually. Its well-rounded strategy makes it a great choice for investors seeking broad commodity exposure.

5. Invesco DB Precious Metals Fund (DBP)
   DBP focuses on gold and silver futures, with an 80% allocation to gold and 20% to silver. Silver’s industrial uses, particularly in solar panels and electronics, make it a compelling addition to a precious metals portfolio. With a three-year return of 14.11% and a distribution yield of 3.82%, DBP is a strong option for investors seeking exposure to precious metals.

6. FT Vest Gold Strategy Target Income (IGLD)
   IGLD combines gold price exposure with monthly income distributions. The fund buys long call options and sells short put options on the SPDR Gold Shares ETF (GLD). While its three-year return of 10.31% is slightly lower than some other funds, its 19.70% distribution yield makes it an attractive choice for income-focused investors.

The Bottom Line: Commodities as a Portfolio Powerhouse

Commodity ETFs offer a powerful way to diversify your portfolio and hedge against market volatility. By allocating 1% to 3% of your portfolio to commodities, you can reduce risk and capture the unique returns of assets like gold, oil, and agricultural products. While commodities are inherently more volatile than stocks or bonds, the right ETF can provide both growth and income, helping you build a more resilient investment strategy over time.

As with any investment, it’s important to approach commodity ETFs with caution and carefully evaluate their risks and rewards. Start small, monitor performance, and gradually increase your allocation as you gain confidence in this asset class. With the six ETFs highlighted here, you have a solid foundation to begin your journey into the world of commodities.

This summary provides a comprehensive overview of commodity ETFs, their benefits, and how to incorporate them into your investment strategy. It’s designed to be informative yet accessible, helping you make informed decisions about diversifying your portfolio.