How to Invest in Commodities: From ETFs and Index Funds to Direct Investments

Investing in commodities comes with a number of benefits for your portfolio. Aside from simply helping you diversify outside of the stock market, commodities investments can help you hedge against inflation to preserve your capital and even outperform the stock market, if you manage to pick the right commodity at the right time.

There are hundreds of different commodity ETFs out there, and choosing the best commodity ETFs has a lot to do with your investment goals and what type of commodities you'd like to invest in. The best commodities to invest in include energy, oil and gas, metals, agricultural products, water, and more. Some commodities ETFs focus on a specific commodity, such as oil or precious metals, while others focus more broadly on commodities in general.

Broad commodity ETFs

• Aberdeen Standard Bloomberg All Commodity Strategy K-1 Free ETF (BCI)
• Invesco DB Commodity Index Tracking Fund (DBC)
• iPath Bloomberg Commodity Index Total Return ETN (DJP)

Diversified commodities ETFs are great for investors who want to lessen risk by spreading their exposure across multiple industries.

Aberdeen Standard Bloomberg All Commodity Strategy K-1 Free ETF (BCI) is a top-performing commodity ETF that offers exposure to 20+ commodities across the precious metals, oil, and agricultural industries. Thanks to large holdings in gold and oil, this ETF has seen impressive growth recently.

Invesco DB Commodity Index Tracking Fund (DBC) is another diversified commodity index of futures contracts. This fund tracks 14 of the most traded commodities, with crude oil and natural gas comprising its primary holdings, followed by metals and agricultural commodities.

If you prefer a more balanced fund that doesn't favor oil and gas as heavily as those above, the iPath Bloomberg Commodity Index Total Return ETN (DJP) is one of your best bets. It's experienced substantial growth this year. However, as an ETN, you're investing in unsecured debt notes rather than in a fund that holds the assets, as you would with an ETF. 

Precious metals ETFs

• GraniteShares Gold Trust (BAR)
• iShares MSCI Global Silver&Mtls Mnrs ETF (SLVP)
• SPDR Gold Shares (GLD)
• Aberdeen Standard Physical Palladium Shares ETF (PALL)
• Aberdeen Standard Physical Gold Shares ETF (SGOL)
• Aberdeen Standard Physical Platinum Shares ETF (PPLT)

Investing specifically in metals ETFs can be a good way to hedge against inflation, or to achieve outsized returns if you expect a particular metal to achieve a run-up in the near future. For example, the price of gold has been on the rise, so investing in gold with gold ETFs like SPDR Gold Shares (GLD) have also seen impressive growth. You can also invest in the best gold stocks if you prefer stocks to ETFs.

Other, arguably more valuable precious metals like palladium and platinum may be undervalued, which can present a good opportunity to get in at a discount. ETFs like Aberdeen Standard Physical Palladium Shares ETF (PALL) and Aberdeen Standard Physical Platinum Shares ETF (PPLT) make it easy to gain exposure to these metals.

Oil and gas ETFs

• United States 12 Month Oil Fund (USL)
• United States 12 Month Natural Gas Fund (UNL)

Investing in oil ETFs can help protect your portfolio from market downturns and inflation. While this can be a risky place to invest, and you should be aware of the cyclical nature of the oil and gas market, there's potential for outsized returns here.

The United States 12 Month Oil Fund (USL) gives you direct exposure to oil through futures contracts indexed to crude oil in west Texas. This fund has performed exceptionally well in recent years, although that's no guarantee of future returns.

Agricultural ETFs

• Invesco DB Agriculture Fund (DBA)
• Teucrium Corn Fund ETV (CORN)
• Teucrium Agricultural Fund (TAGS)
• Elements Rogers International Commodity Index-Agriculture ETN (RJA)
• iPath Series B Bloomberg Grains Subindex Total Return ETN (JJG)

Farmland and agricultural investments tend to be some of the best assets to hold in inflationary environments. What's more, they're generally lower risk and offer a level of stability to your portfolio. That said, the best agricultural ETFs are based in futures contracts, which does carry its own level of risk.

Diversified agricultural ETFs like the ​​Invesco DB Agriculture Fund (DBA) offer exposure to a variety of different agricultural products. The Teucrium Agricultural Fund (TAGS), for example, is actually a combination of four different Teucrium ETFs: CANE (sugarcane), SOYB (soybeans), WEAT (wheat), and CORN (corn).

There are also funds that track specific agricultural products. The iPath Series B Bloomberg Grains Subindex Total Return ETN (JJG) tracks an underlying index of grains that includes wheat, soybeans, soybean oil, corn, and soybean meal, while the Teucrium Corn Fund ETV (CORN) tracks corn futures contracts.

Water ETFs

• First Trust Water ETF (FIW)
• Invesco S&P Global Water Index ETF (CGW) 

ETFs present one of the best ways to invest in water as a commodity. As a highly in-demand and increasingly scarce commodity, water certainly has some potential to be a lucrative asset going into the future.

The First Trust Water ETF (FIW) is one of the largest ETFs with exposure to the water and water infrastructure market, and it's also very balanced in its holdings. If you prefer to invest in a diversified basket of water and water-adjacent companies, the Invesco S&P Global Water Index ETF (CGW) has holdings in public water utility company American Water Works Co. Inc. (AWK), French water and waste management company Veolia Environment SA (PAR), and water technology provider Xylem Inc. (XYL).

Sometimes ETFs and index funds don't perfectly track underlying commodities, and they can even follow the same patterns as the stock market at times. Investing directly in commodities can give investors the advantage of uncorrelated returns and ownership over a real asset.

While you probably aren't going to go buy a barrel of oil, you can purchase gold and other precious metals directly and even buy farmland. That said, doing so isn't always easy and convenient, and it often comes with its own costs. 

Holding physical gold can be one of the best ways to invest in gold, but you'll have to worry about storage and insurance. Buying farmland involves a steep initial investment and comes with the work of managing and/or renting out the land. Not to mention, you have to know about the best places to buy farmland in the first place.

Thanks to new online investing platforms, it's now easy to invest directly in these assets, even if you only have a few dollars to spare—and you don't have to worry about storing or actively managing your assets either.

FarmTogether is a farmland investing platform that lets you invest in institutional-quality farmland with as little as $15,000. You invest in a portion of an already operating farm that can generate cash flow, so you don't have to worry about choosing the land or managing it.

Vaulted is an investing app that lets you buy gold online, and they'll source and store it for you. This is one of the easiest ways to buy gold, and unlike purchasing shares of gold ETFs and funds, you know exactly what you're investing in.

EnergyFunders makes investing in oil similarly convenient. You'll get direct access to cash flow returns from vetted oil and gas projects, and in addition to that, you can even invest in a portion of a Bitcoin mining project.