This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

What Commodity ETF Investors Should Know

Stocks in this article: UNG USO GRES DBC

By Michael Johnston, founder of ETF Database

It's difficult to put a finger on the exact cause of the recent surge in popularity of commodity investing. More than likely, the boom is attributable to a number of different factors. Correlation between international equity markets (and even between stocks and bonds) has surged in recent years, increasing both the importance and difficulty of adding noncorrelated assets to investor portfolios. Given the relatively weak correlation with other asset classes, commodities have found a home in many investors' portfolios.

Moreover, unprecedented injections of liquidity into the financial system have created anxiety over a coming uptick in inflation that could erode returns to stocks and fixed-income instruments. Commodities have historically served as an effective inflation hedge, and many are once again turning to natural resources to protect assets from a surge in the CPI.

Regardless of the cause, commodity investing is hot, and many investors have turned to ETFs as a way to gain commodity exposure. There are three primary ways to gain exposure to commodity prices (as well as two spinoffs) through exchange-traded products, and each can potentially offer a very unique risk and return profile:

1. Physically-Backed ETFs

The most efficient way to gain exposure to changes prices of natural resources is to actually buy and hold the underlying commodity. Portfolios utilizing this strategy will ensure a near perfect correlation with the spot price of the commodity, because the value of the underlying holdings will move in unison with market prices.

Unfortunately, the physical properties of many commodities make physical storage impractical or prohibitively expensive. The physically backed exposure approach only makes sense for commodities that 1) are nonperishable, 2) are easily stored, and 3) maintain high value-to-weight ratios.

As such, the universe of physically backed ETFs is essentially limited to precious metals funds that store bullion in secure vaults. Commodities available through physically backed ETFs include gold, silver, platinum and palladium.

2. Futures-Based Funds

While the physically backed ETF structure works well for precious metals, a similar approach obviously wouldn't work with the majority of commodities. A physically backed livestock ETF would be a potential disaster for obvious reasons, while the storage costs and logistical headaches associated with a fund storing barrels of oil or bushels of wheat would likely necessitate a double-digit expense ratio.

1 of 3

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,811.28 +33.13 0.19%
S&P 500 2,061.23 +48.34 2.40%
NASDAQ 4,748.3960 +104.0840 2.24%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs