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Commodity ETF - Investing in Commodities With a Commodity ETF


Investing in a commodity ETF is one of the easiest ways to participate in the commodity markets and also diversify your investment portfolio. An ETF is an Exchange Traded Fund that is very similar to a mutual fund, but it has very little management. A commodity ETF has a set plan for investment in a group of commodities that may be readjusted periodically by the fund manager.

A commodity ETF can come in several forms, but most were created to mirror the returns of commodities by investing in the commodity futures markets. They are all buy futures contracts based on the amount of funds they receive from investors. An excellent feature is that they trade just like a stock and you can buy or sell at any time during market hours. More importantly, you cannot lose more than your initial investment with an ETF, as many have this fear when they consider the futures markets.

Some commodity ETFs focus on commodity sectors and only buy futures contracts in that area – oil, agriculture or gold. As an overall investment to diversify your portfolio, you probably want to focus on a commodity ETF that invests in a more diversified basket of commodities. The following are three of the more popular commodity ETFs:

1. iShares S&P GSCI Commodity-Indexed Trust
Ticker Symbol: GSG

This commodity ETF was setup to track the Goldman Sachs Commodity Index. GSG tracks 24 different commodities. It is weighted with approximately 67% invested in energy, 16% in agriculture, 7% in industrial metals, 7% in livestock and 3% in precious metals. The index is production weighted to reflect the relative significance of those commodities to the world economy.

2. iPath Dow Jones-AIG Commodity Index
Ticker Symbol: DJP

This commodity ETF was setup to track the Dow Jones AIG Commodity Index. The commodities represented in DJP are rebalanced annually. Each commodity subgroup exposure is capped around 33%, however the weightings fluctuate between rebalancings due to changes in market prices.

3. PowerShares DB Commodity Index Tracking Fund
Ticker Symbol: DBC

This commodity ETF seeks to reflect the performance of the Deutsche Bank Liquid Commodity index. The index commodities are comprised of light sweet crude oil, heating oil, aluminum, gold, corn and wheat. DBC has a smaller number of commodities in this ETF than the other two, so take a close look at the six commodities before you invest.

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