The Best Commodity ETFs

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Exchange-traded funds have opened up the world of commodities to investors who never had access to them before. The commodity ETFs below allow you to buy everything from precious metals (gold and silver) to oil, natural gas, and even obscure commodities like coffee, soybeans, and corn.

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Precious metals

Metals like gold and silver are perfect for exchange-traded funds because they don't go stale like food commodities, and are easy to store unlike flammable natural gas and oil. The SPDR Gold Shares and iShares Silver Trust are the biggest and most popular ETFs for buying gold and silver, carrying annual expense ratios of 0.40% and 0.50%, respectively.

These funds simply track the movements in the spot price for gold and silver by holding physical precious metals in storage at large banks around the world. The silver ETF holds silver at Brink'sin London, and JPMorgan in London and New York. HSBCis the custodian for the gold in the SPDR Gold Trust.

Because these ETFs hold physical precious metals, they closely track the ups and downs in the value of gold and silver, resulting in returns that differ only by the modest annual expense ratios for each fund. To leverage the rise in gold and silver prices, consider investing in gold or silver miner ETFs.

Oil and natural gas

Unlike gold or silver, ETFs can't simply store oil and natural gas in storage tanks. The United States Oil and United States Natural Gas ETFs invest in these energy commodities by buying the front-month futures contract. Thus, these funds buy short-term futures contracts and roll them over each month.

Because oil and natural gas ETFs invest in futures contracts, their performance can vary wildly from the performance of oil and natural gas spot prices. Frequently, futures dated further out in the future trade at a premium to near-dated futures contracts. Thus, July oil futures might trade for $60 a barrel while August futures trade at $62 per barrel. When the July futures are rolled into August futures, the ETFs effectively sell oil at $60 to buy it at $62.

Over time, the difference in prices results in falling prices for oil and natural gas ETFs, thus making them suitable only for short-term speculation rather than long-term investing.Investors who want to make a long-term investment in oil and natural gas producers might prefer the SPDR S&P Oil & Gas Exploration and Production ETF , which invests in a diversified portfolio of 60 oil and gas producing companies and carries an annual expense ratio of just 0.35% annually.

Diversified commodities

You can invest in a portfolio of commodities by investing in the United States Commodity Index, which tracks a portfolio that includes everything from gold and silver to soybeans, tin, coffee, copper, and even cattle!

Like the oil and natural gas ETFs, this fund also invests in futures and rebalanced monthly, making it susceptible to declines even when commodity prices are rising. Therefore, this ETF is best for short-term speculation rather than long-term buy and hold.

Long-term investors might prefer the iShares MSCI Global Agriculture Producers ETF , which invests in companies that benefit from rising commodity prices directly (food producers) and indirectly (equipment producers like Deere & Company). When paired with an precious metals ETF, investors will have exposure to rising commodity prices in a diversified fashion, and avoid the risks that come with futures-based ETFs.

The article The Best Commodity ETFs originally appeared on Fool.com.

Jordan Wathen has no position in any stocks mentioned. The Motley Fool is short John Deere. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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