Commodity exchange traded funds are hot. Assets in SPDR Gold Shares (GLD) have surged to nearly $60 billion to make it the second largest ETF behind the SPDR S&P 500 ETF (SPY).
The threat of inflation and the ease of access of commodity ETFs are some factors that account for the growing popularity of commodity exchange traded funds.
iPath DJ-UBS Cotton ETN (BAL) takes the honor for being the best commodity ETF in 2010 with a sizzling 77% gain. iShares Silver Trust (SLV) takes the second spot with a 70% advance.
Not all commodity ETFs have been winners. United States Natural Gas (UNG), iPath DJ-UBS Cocoa ETN (NIB), and iPath DJ-UBS Lead (LD) cluster at the other end of the performance spectrum losing 40%, 11%, and 5%, respectively.
Given such differences in performance are plausible even within a seemingly related group of ETFs, how does one analyze and choose the best commodity ETF?
Commodity exchange traded funds can be classified into four broad categories: agriculture, energy, precious metals, and industrial metals. The article spells out best commodity ETFs within each category.
To get a grip on this, it is useful to group commodities into major complexes and understand key factors that often tend to drive prices within each complex.
Agricultural Commodity ETF
As demand for agriculture commodities is steadily growing due to a rise in global population, variation in supply is often the major driver of price changes. Weather changes to a large degree account for variability in supply.
Best Commodity ETF
PowerShares DB Agriculture (DBA) which invests in cattle feeder, cocoa, coffee, corn, cotton, lean hogs, live cattle, soybeans, sugar, and wheat.
Energy Commodities ETF
There are three types of energy commodities: oil, natural gas, and products like gasoline & heating oil. The price of energy commodities in general tends to be sensitive to the level of economic activity. While oil is an international commodity whose price is subject to global supply and demand forces, natural gas is primarily a domestic commodity. In products markets, local industrial activity is the main demand driver. Product specifications and availability of refining capacity are among the factors that impact supply.
Top Commodity Exchange Traded Funds
- PowerShares DB Energy (DBE) which invests in a basket of energy commodities including crude oil, heating oil, gasoline and natural gas.
- PowerShares DB Oil Fund (DBO) and United States Natural Gas (UNG) for investors seeking focused exposure to oil and natural gas, respectively.
Precious Metals ETF
Investor see precious metals as an inflation hedge as well as a safe-haven against financial or political turmoil. Prices of precious metals often move with little or no correlation to stock prices. As such, precious metal investments play a useful role in portfolio diversification and risk management.
SPDR Gold Shares (GLD) and iShares Silver Trust (SLV) which invest in gold and silver, respectively.
Industrial Metals ETF