Exploring the Different Types of Commodity ETFs and How to Choose the Right One
Investing with commodity ETFs means investing into an exchange traded fund designed to track the price movement of an underlying commodity. This may be achieved by directly investing in physical ETFs such as gold where the fund purchases and holds a tangible asset in storage. Alternatively, investors can use derivatives and futures-based trading to track the price movements of the benchmark asset.
Physical ETFs offer more direct exposure but they may be subject to additional costs such as insurance. Future-based commodity ETF trading present a wider pool of trading opportunities as they can be used with non-storable commodities but may be subject to roll costs and tracking errors.
This guide will explore the different types of commodity ETF in more detail and will also look at:
- Types of commodity ETF by sector
- Which factors to consider when choosing the right commodity ETF for your portfolio
- How leveraged and inverse commodity ETFs work and if they may be right for you
- Some of the most frequently asked questions about trading with top commodity ETFs
What Are Commodity ETFs?
Commodity ETFs are exchange traded funds that track the price of one or a group of commodities. Trading with futures-based commodity ETFs means owning contracts backed by the commodity itself where the price of a commodity ETF is directly related to the value of the underlying asset and can change fast in line with activity on the live markets.
Some of the most popular commodity ETFs are SPDR S&P Oil & Gas Exploration and Production ETF, US Tech 100 ETF and SP 500 ETF.
There are some key benefits to investing in commodity ETFs – most commonly, they can play a crucial role in diversification across an investment portfolio. Choosing the best commodity ETFs in line with your trading style is also essential, as well as investing wisely based on your goals.
Physical vs Futures-Based Commodity ETFs
There are two main structures of commodity ETFs associated with different types of benefits, potential downsides, returns and risk. The key difference between the two structures is grounded in whether or not the ETF purchases a tangible asset.
Investing into the physical commodity is a more stable approach but may come with lower returns due to the lower level of risk.
Taking the “indirect” trading route via investing using derivatives and future-based contracts does come with a higher level of risk but it may also offer higher returns.
Adopting an effective strategy that balances your portfolio in line with trading goals and a level of risk with which you are comfortable is essential. Take the time to research commodity ETFs and track the commodities in which are you are interested and how they move with the live markets, as this can also support informed trading decisions.
Physical Commodity ETFs
Physical commodity ETFs track ownership of physical resources such as gold or silver with the commodity purchased and held in storage by the fund. Best suited to long-term investors, physical commodity ETFs offer direct exposure and full transparency because the value of the ETF is tied to the spot price of the commodity.
While this means they are not subject to rollover costs, traders may find that rent, security and other costs associated with storing physical assets may negatively impact returns.
Futures-Based Commodity ETFs
Investing in a fund comprised of derivatives is the most common way to trade using commodity ETFs. This offers traders access to a “basket” of commodities without the need to own a physical asset. This may be a specific benchmark index made up of a specific group of commodities or a “broad basket” commodity ETF that takes in a range of commodities for diversification.
Typically associated with short-term traders, a key benefit is being exposed to the futures-based contracts instead of the commodity itself for a highly accessible trading style. By using derivatives, traders at all levels can gain exposure to commodity prices and buy futures or swap contracts on the benchmark commodity without any requirement to be exposed to the commodity itself.
It’s a low-cost way to access asset classes that may otherwise be tricky to invest in. However, due to the nature of this exposure traders may incur rolling costs should short-term contracts develop into longer ones and trades may also be subject to tracking errors.
Some commodity ETFs provide a low-cost way to access asset classes that might otherwise be difficult to invest in and can help you diversify your portfolio. However, traders should be aware that this style of trading can also expose your portfolio to a high level of volatility and sudden price swings.
This is due to its vulnerability in the face of macroeconomic events such as inflation, changes in interest rates or geopolitical conflict. Therefore, a strategic approach considering risk appetite and long-term goals should always be used.
Types of Commodity ETFs by Sector
Below we have outlined the major commodity ETFs by sector including the key benefits of investing with each type and the options available.
Energy Commodity ETFs
Tracking the oil, gas, and fuel markets, energy commodity ETFs typically take the form of future-based contracts offering direct equity exposure to pricing, or equity-based energy sector ETFs and indirect exposure via investments into energy companies through product and service providers. Key futures-based funds include the United States Oil Fund and the Invesco DB Energy Fund.
Some of the most attractive features associated with energy commodity ETFs include strong, consistent global demand especially in emerging markets, good standing against inflation and great potential hedging opportunities when energy prices increase in tandem with the value of the US dollar declining.
The United States Oil Fund, the United States Natural Gas Fund, Vanguard Energy ETF and Fidelity MSCI Energy Index ETF are some of the most widely-talked-about energy commodity ETFs.
Agriculture Commodity ETFs
Agricultural commodity ETFs offer strong opportunities for diversification via investments into a combination of agricultural assets, with trading baskets including everything from crops and grains to livestock and farming equipment.
Investors can choose either to invest using an index comprised of stocks from agribusiness companies listed on stock exchanges (also known as agribusiness ETFs) or by using derivatives contracts to invest directly or indirectly in either one or a collection of agricultural commodities.
Top agricultural ETFs include the Invesco DB Agriculture Fund (DBA) and nVanEck Vectors Agribusiness ETF (MOO). With agriculture prices influenced by factors such as weather and disease, traders may be able to access strategic investment opportunities to capitalise on short-term disruptions in global supply chains. Along similar lines, factors such as population growth can lead to high market volatility, sudden price movements and good opportunities for traders.
Metals Commodity ETFs
This sector includes some of the most consistently popular commodity ETFs, covering precious metals such as gold and silver, and industrial metals like copper and zinc. Depending on the desired outcome (e.g. long-term positioning or growth via equities), traders can invest using physical commodities and hold the metals in vaults or futures-based contracts and track metal prices.
Mining stocks ETF also allow traders to invest in companies that produce metals but trades are tied to company performance and therefore subject to risk in this aspect.
While futures contracts allow traders to benefit from low-cost and high liquidity with their trades, metal commodity ETFs are subject to the same risks as in other ETF sectors including high volatility and a drop in value when contracts roll over.
Some of the most well-known metals ETFs include SPDR Gold Shares, iShares Silver Trust, Invesco DB Base Metals Fund and the U.S. Copper Index Fund.
Broad Commodity ETFs
Offering diversified exposure across multiple sectors using a “broad basket” of commodities, broad commodities offer a great way to manage risk, reduce the impact of more volatile commodities and gain exposure to a range of sectors. They typically follow commodity indices such as the Bloomberg Commodity Index with potential benefits including a good hedge against inflation, a simplified, easy-to-manage investment structure and good liquidity.
There is also a good degree of flexibility as traders can choose the broad commodity ETF that best aligns with their interests and portfolio needs. For example, some ETFs may be more heavily weighted in favour of metals or energy and some will offer broader exposure than others due to the individual components included. Some broad commodity ETFs may include a mix of futures and commodity-related components.
Popular Broad commodity ETFs include the following: Invesco DB Commodity Index Tracking Fund and the Invesco Optimum Yield Diversified Commodity Strategy ETF.
Inverse and Leveraged Commodity ETFs
Representing a type of superpowered ETF and designed for short-term traders with a high risk tolerance, leveraged and inverse commodity ETFs are specialised funds designed to increase returns (“leveraged”) up to three-fold on a commodity or profit from declines (“inverse”) up to three-fold in a bearish market.
As performance is compounded daily, holding either type of ETF for any more than a day means placing your portfolio at great risk of high losses. This is a fast-moving trading style often used in volatile, unpredictable markets therefore it is best suited for those with short-term trading goals.
Furthermore, it is suited to those who prefer to trade within a high-risk structure who can accommodate the potential for high losses (with the benefit of good potential for high returns too).
Best Performing Commodity ETFs in 2025
Some of the best commodity ETFs to invest in and consistently the most popular include precious metals such as gold and silver for physical commodity trading and oil and natural gas for futures-based contract trading. Overall, some of the top-performing ETFs this year so far include:
- USCF Gold Strategy Plus Income Fund (USG)
- GLDM (SPDR Gold MiniShares)
- Invesco DB Commodity Index Tracking Fund (DBC)
- Invesco Optimum Yield Diversified Commodity Strategy
The Vanguard Commodity ETF (Vanguard Commodity Strategy Fund) is a good example of an ETF designed for those seeking exposure to broad commodities. Fidelity Commodity ETFs are also notable for their wide range of well-established funds, offering good opportunities for many different types of traders.
How to Choose the Right Commodity ETF for Your Portfolio
Structuring your portfolio effectively is not simply about choosing the biggest commodity ETFs. Instead, it should begin with defining your trading visions (short- or long-term), risk appetite and goals (e.g. diversification or hedging).
Physical commodity ETF investing is best suited to those with a longer-term trading style and a moderate approach to risk who prefer strong transparency and a good level of predictability in their trading journey.
Trading with futures-based commodity ETFs has a higher level of risk but it can also be a great tool for hedging against inflation or aiming to profit during stock market downturns. However, the need to consistently roll over futures contracts inevitably involves regular expenses that need to be factored into the chosen trading strategy.
FAQs About Commodity ETFs
What is a commodity ETF?
Exchange traded funds that track the price of a single or group of commodities either by investing directly into the physical commodity or by trading with futures-based contracts.
What are the advantages of commodity ETFs?
Commodity ETFs offer great opportunities for diversification, hedging against inflation and accessing a range of commodities via future contracts – without the requirement to own any physical asset, this makes trading in certain sectors more accessible to less experienced traders as well as those without a large amount of capital to invest at the initial stages.
They are also a useful trading tool for those who want to limit exposure and access a range of methods to manage risk. When trading via a brokerage specifically, commodity ETFs represent an easily accessible, low-maintenance style of trading that will be attractive to many.
Which sectors do commodity ETFs cover?
Commodity ETFs typically cover the energy, agriculture and metal sectors plus broad basket commodities. Energy includes oil, gas and fuel, agriculture covers all aspects of agricultural production from soft crops (coffee, sugar) and grains to livestock and farming equipment via investment in agribusiness ETFs.
Metals include precious and industrial metals with some of the most well-known ETFs associated with commodities such as gold and silver. The fourth category – broad baskets – includes a mix of the aforementioned sectors with strong focus on diversification using a range of commodities.
Are commodity ETFs risky?
The key risk associated with futures-based contract ETFs is contango/backwardation. Contango refers to when the futures price of a commodity is higher than the actual current price of the physical commodity meaning a negative roll yield (reducing the rate of returns) and inaccurate price tracking. Tracking errors can be common with derivatives-based trading as ETFs may not accurately track the benchmark indexes over time.
Backwardation is when the current market price for the asset is higher than its futures price, which is risky in terms of higher losses if prices don’t decline as expected as well as the risk of higher volatility and reduced liquidity.
Understanding the risks involved and preparing a strategy that best positions your portfolio to protect against risk and accommodate your risk appetite is the best approach.
Expert firms such as brokerages can help to build a tailored commodity ETF trading strategy to suit every individual and best position the portfolio in line with good risk management protocols.
How do I choose between physical and futures-based ETFs?
This will depend on your risk tolerance and appetite as well as the type and level of returns you are aiming for. Physical ETFs are best suited to those who prefer to focus their interest on precious metals and single commodities within a stable trading environment and longer-term investment plan.
Futures-based ETFs offer traders the potential for diversified exposure to commodities, sometimes through a broad basket ETF. Best suited to day traders and those with a shorter-term trading outlook, they are typically associated with both higher risk and higher potential for returns.
Can you hold commodity ETFs in an IRA (Individual Retirement Account)?
Yes, ETFs are generally considered admissible into IRAs but it’s important to check with the designated IRA custodian or administrator to fully understand if there are any specific restrictions, implications or procedures associated with these trades under their guidelines.
In fact, commodity ETFs can offer a number of potential advantages for IRA holders, such as diversification outside of traditional investments, inflation hedging and potential tax advantages depending on the type of IRA held.
Which are the best-performing commodity ETFs in 2025?
There are a number of broader and more specific factors to consider when it comes to assessing commodity ETF performance, such as consistent high performance over a long period of time compared to those ETFs enjoying a demand surge in the context of specific market activity.
As of July 2025, some of the top-performing ETFs include the following: SPDR S&P Oil & Gas Exploration and Production ETF; Franklin Responsibly Sourced Gold ETF (FGDL), and Horizons Natural Gas ETF (HUN).
What’s the difference between ETFs and mutual funds for commodities?
One of the main differences is that ETFs can be traded throughout the day but mutual funds are typically only bought or sold at the end of the trading day at net asset value. Because of this, ETFs are associated with a higher level of liquidity in comparison.
Management style with ETFs tends to be passive and focused on index tracking but mutual funds usually involve more active intervention, typically from a fund manager. Fees associated with ETFs are typically lower than mutual funds while ETFs tend to be the more tax efficient of the two.
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