To understand what a commodity ETF is, let’s first look at what a commodity is. A commodity is any natural resource that holds/carries a value in commerce. Corn, wheat, soybeans, sugarcane, coffee, cotton, rice, cocoa, and lumber are examples of agricultural commodities. Precious metals such as gold, silver, platinum, palladium, and copper are another commodity type. Crude oil and natural gas are a type of energy commodity. A livestock commodity would include live cattle and lean hogs.
Any natural resource that can be harvestable, mined, or extracted; is fungible with another of the same type (i.e., one bushel of corn can be easily interchanged for another bushel of corn elsewhere); has a use and value in commerce, is a commodity.
A commodity ETF is a commodity exchange-traded fund that pools investments into purchasing and tracking a specific commodities futures security or purchasing a specific physical commodity.
An exchange-traded fund allows an investor to diversify their investment portfolio with less capital needed, compared to purchasing actual commodity contracts or physical commodities, while being professionally managed, actively or passively, by the fund’s manager of the ETF.
Furthermore, a commodity ETF allows the investor to buy/sell at any time the market is open, compared to a mutual fund, where you are restricted to buying/selling at the close of the market.
There are costs associated with buying, holding, or selling a commodity exchange-traded fund. Besides any commissions your broker may charge you to buy or sell a commodity ETF, you may also be charged an expense ratio, which is a fee for managing the investments/securities pooled in the exchange-traded fund, administration of the fund, marketing of the fund; and other expenses attributed to the fund.
