10 Unexpected Commodity ETFs That Will Turbocharge Your Portfolio Diversification in 2025
Forget everything you thought you knew about commodity exposure—these ten ETFs rewrite the diversification playbook entirely.
Breaking the Traditional Mold
Most investors treat commodities like a boring insurance policy—something to hold when everything else tanks. But these ten funds flip that narrative on its head. They're not your grandfather's gold bars or oil futures.
Hidden Gems Exposed
We dug deep into the ETF universe to uncover strategies most wealth managers won't mention—probably because they can't charge 2% fees on them. From water rights to rare earth minerals, these funds tap into commodities that actually matter in today's economy.
The Contrarian Advantage
While everyone's chasing the same tech stocks, smart money's building real diversification. These ETFs offer genuine non-correlation—something Wall Street claims to provide but rarely delivers. Because nothing says 'portfolio protection' like assets that don't move in lockstep with the S&P 500.
Execution Matters
Implementing these strategies requires precision timing and risk management. Unlike traditional ETFs, these vehicles demand active monitoring—perfect for investors who actually enjoy making money rather than just watching charts.
Because let's be honest—most diversification advice comes from people who've never actually survived a real market crash. These ten ETFs? They're built for the volatility ahead.
The Modern Portfolio Imperative
The conventional wisdom of a 60/40 stock and bond portfolio has long been a cornerstone of asset allocation, yet its effectiveness has faced scrutiny in an era marked by rising inflation and heightened global volatility. Traditional financial assets like stocks and bonds can become vulnerable when both equity markets and fixed income markets experience simultaneous shocks. This environment underscores the imperative for investors to seek alternative asset classes that can provide true diversification and act as a hedge against inflation.
Commodity exchange-traded funds (ETFs) present a compelling solution. As “real assets” that are fundamentally tied to the raw materials of the global economy—including agricultural goods, energy, and precious metals—commodities often react to economic shifts differently than financial assets. For these reasons, commodity ETFs have grown in popularity, offering investors a convenient way to gain exposure to these tradable goods without the complexities of physical ownership or direct futures trading. This report serves as a comprehensive guide that goes beyond a simple list of top performers, providing a detailed analysis of the underlying mechanics, benefits, and significant risks that investors must understand to make informed decisions.
The Ultimate List: Our Top 10 Picks for Diversification & Inflation Hedging
This curated list provides an initial overview of 10 commodity ETFs and exchange-traded commodities (ETCs) selected for their performance and distinct investment strategies. While performance can fluctuate, these funds represent a cross-section of the commodity ETF landscape, from broad-based diversifiers to highly focused and specialized vehicles. The table that follows offers a quick snapshot of these funds to provide immediate, scannable data.
Our Top 10 List
A Quick Look at Our Top 10 Commodity ETFs
Performance data is for informational purposes only and is not indicative of future results.
The Core Value Proposition: Why Bother with Commodities?
The Uncorrelated Advantage: True Portfolio Diversification
One of the most significant benefits of adding commodity exposure to a portfolio is their historically low correlation with traditional asset classes like stocks and bonds. This independence is crucial for diversification, as it means commodities tend not to MOVE in sync with the rest of the market. During the period from 1991 to 2025, for example, the Bloomberg Commodity Total Return Index exhibited a low correlation with U.S. equities and a correlation close to zero with global bonds. When a portfolio’s asset classes are not perfectly correlated, the overall volatility of the portfolio can be reduced, which may lower risk and lead to more consistent returns over time.
However, it is a simplification to assume this low correlation is a constant. Analysis of historical data reveals that the relationship between stocks and commodities can change over time, often spiking during “periods of economic distress”. This temporary increase in correlation during recessions can be attributed to a widespread decline in aggregate demand that affects a wide range of asset classes simultaneously. This dynamic means that while commodities can be an effective hedge against idiosyncratic shocks or sector-specific downturns, they may not offer the same level of protection during a major, systemic financial crisis where correlations across all assets tend to converge. Acknowledging this nuance is essential for a realistic understanding of the role commodities play in a well-diversified portfolio.
A Powerful Hedge Against Inflation
Another key function of commodities is their role as a hedge against inflation. As “real assets,” commodities are raw materials that are directly used to produce consumer goods and services. Consequently, their prices tend to rise as inflation accelerates. This makes them fundamentally different from financial assets like stocks and bonds, whose future cash flows can be devalued by faster inflation. Research from Vanguard Group has shown that commodities can be a potent hedge against unexpected inflation, with prices rising 6% to 9% for every 1% increase in unexpected inflation. This outsized positive correlation with inflation makes a small allocation to commodities a valuable tool for preserving purchasing power over time.
The Master Class: Understanding Commodity ETF Structures & Their Hidden Risks
Not all commodity ETFs are created equal. Their underlying structure can dramatically affect their performance, volatility, and tax treatment. Understanding these differences is the most critical step for any investor considering this asset class.
Physically-Backed Funds: The Simple, Direct Path
Physically-backed funds are the most straightforward type of commodity ETF. They function as trusts that hold the actual physical commodity, such as Gold or silver bullion, in secure vaults. Each share in the fund represents a fractional ownership interest in the stored physical asset. Because these funds directly own the commodity, their performance tends to closely track the spot price of that commodity, avoiding the complexities associated with futures contracts. This structure is, however, only practical for a limited number of commodities that are durable, non-perishable, and easy to store, which is why it is most common for precious metals like gold, silver, and platinum.
Futures-Based Funds: The Most Common & Complex Structure
For commodities that are too bulky, perishable, or costly to store—such as oil, corn, or natural gas—ETFs typically use a futures-based structure. These funds do not own the physical commodity but instead invest in futures contracts, which are agreements to buy or sell a specific quantity of a commodity at a predetermined price on a future date.
This structure introduces a crucial dynamic known as the “roll over” process. As a futures contract approaches its expiration date, the fund manager must sell that expiring contract and purchase a new one with a later expiration date. This perpetual process is subject to market conditions that can create a significant drag on returns.
The two key market states that affect this process are:
- Contango: This is a market condition where the price of a futures contract is higher than the current spot price, and longer-dated contracts are progressively more expensive. Contango is considered the “normal” market state for most commodities due to the costs of carrying and storing the physical asset. In a contango market, a futures-based ETF is forced to “sell low and buy high” with every contract roll over, creating a negative “roll yield” that can significantly erode the fund’s value over time and cause it to underperform the commodity’s spot price.
- Backwardation: This is the opposite scenario, where the spot price is higher than the futures price. Backwardation can occur due to unexpectedly high demand or a supply shortage. In this state, the roll over process becomes profitable, as the fund sells higher-priced expiring contracts and buys lower-priced longer-dated contracts.
The impact of contango on long-term performance can be devastating, making these funds fundamentally unsuitable for buy-and-hold strategies unless the market is consistently in backwardation.
Case Study in Contango: The United States Oil Fund (USO)
The United States Oil Fund (USO) is a prime example of the risks inherent in futures-based ETFs. The fund’s objective is to track the daily changes of the spot price of West Texas Intermediate (WTI) crude oil by holding near-month futures contracts. For years, the fund has underperformed the spot price of oil due to the consistent drag of contango.
The most dramatic example of this vulnerability occurred in April 2020, during the COVID-19 pandemic. An unprecedented supply glut and collapse in demand caused the price of WTI crude oil futures to plunge into negative territory. Faced with the prospect of taking physical delivery of oil they could not store, futures buyers were paying to avoid delivery. The extreme contango in the market caused the USO fund to “collapse and malfunction,” requiring its management to make structural changes, including a 1-8 reverse share split, to prevent a total failure. This event serves as a stark warning that for futures-based ETFs, the fund’s internal mechanics and management of the futures curve are often more important than the underlying commodity’s price movement itself.
Other Structures to Know: ETNs & Producer ETFs
Beyond the two main structures, investors may encounter other types of commodity-related products:
- Exchange-Traded Notes (ETNs): These are unsecured debt notes issued by a financial institution, promising to pay a return based on a referenced commodity index, minus fees. A key distinction from ETFs is that ETNs are not backed by any underlying assets or securities, which means they carry the credit risk of the issuer.
- Commodity Producer ETFs: These funds hold stocks of companies that produce or process commodities, such as gold-mining or oil-drilling firms. While their performance is somewhat tied to the underlying commodity price, their value is also influenced by company-specific factors like operational risks, labor issues, and financial health. As a result, these funds may perform more in line with other stock ETFs than with the commodity’s spot price, which can reduce their effectiveness as a diversification tool against equity market downturns.
A Deeper Dive into Our Top Picks
This section offers a more detailed look at the funds highlighted earlier, connecting their structures to the principles outlined above.
Spotlight on DBC and COMT
The Invesco DB Commodity Index Tracking Fund (DBC) and the iShares GSCI Commodity Dynamic Roll Strategy ETF (COMT) are two prominent examples of broad-based, futures-based commodity funds. DBC seeks to track the DBIQ Optimum Yield Diversified Commodity Index Excess Return, which is composed of futures contracts on 14 of the world’s most-traded commodities. Similarly, COMT seeks to track an index that provides broad commodity exposure with an enhanced roll selection. The holdings of these funds are not the physical commodities themselves but rather the futures contracts and the cash and short-term Treasury securities that serve as collateral for their futures positions.
Spotlight on FGDL and PPLT
The Franklin Responsibly Sourced Gold ETF (FGDL) and the abrdn Physical Platinum Shares ETF (PPLT) represent the physically-backed category. Both funds have shown strong recent performance. PPLT is a physically-backed ETC that invests directly in platinum bullion. FGDL’s name, “Responsibly Sourced Gold ETF,” suggests an additional LAYER of structural nuance, focusing on a specific investment objective beyond simple price tracking.
Comparative Deep Dive: Key Commodity ETFs
Critical Risks & Considerations Before You Invest
An investment in commodity ETFs is not without significant risk. Beyond the structural complexities, investors must be aware of the following:
- Volatility: Commodity prices can experience wide and sudden swings due to unpredictable events, such as severe weather, natural disasters, or geopolitical conflicts. This inherent volatility necessitates a cautious approach to position sizing.
- Taxation: The tax treatment of commodity ETFs can be complex and may vary depending on their structure. Futures-based funds, often structured as commodity pools, issue a Schedule K-1 tax statement instead of the more common Form 1099. These K-1s may not be available in time for annual tax filings, potentially requiring an extension. Additionally, physically-backed gold ETFs are taxed as collectibles under U.S. rules, which may result in a higher tax rate than the long-term capital gains rate.
- Tracking Error: Funds that invest in futures contracts may not perfectly track their benchmark indexes over time. This is often due to the cumulative effects of management fees, administrative costs, and the negative roll yield from contango.
- Portfolio Allocation: To maintain the benefits of diversification, investment professionals suggest limiting a portfolio’s total exposure to commodities. Allocating more than 5% to 10% of a portfolio to commodities may begin to reduce the intended diversification benefits.
Frequently Asked Questions (FAQ)
- What is a commodity ETF in simple terms? A commodity ETF is an exchange-traded fund that tracks the price of a specific commodity or a basket of commodities. It allows an investor to gain exposure to commodities like gold, silver, or oil by purchasing shares on a stock exchange.
- Do commodity ETFs pay dividends? Most commodity ETFs do not pay dividends. This is because their returns are based solely on the price appreciation of the underlying commodity or futures contracts, which do not generate regular income like company stocks do.
- How are commodity ETFs taxed? Tax treatment depends on the fund’s structure. Funds that own physical assets (like gold) may be taxed as collectibles. Funds that invest in futures contracts may be taxed as a partnership and issue a Schedule K-1 form for tax purposes.
- What is the difference between a gold ETF and a gold mining ETF? A gold ETF holds physical gold bullion or uses derivatives to track the price of gold itself. A gold mining ETF, by contrast, holds the stocks of companies that mine and refine gold. A gold mining ETF is therefore subject to the operational and financial risks of the companies it holds, and its performance may be more correlated with the equity market than with the price of gold.
- How do I invest in a commodity ETF? An investor can purchase shares of a commodity ETF through a standard brokerage account, just like a regular stock.
- Is it better to invest in a commodity ETF or trade futures directly? Trading futures contracts directly offers more control, potentially higher liquidity, and distinct tax advantages under IRS Section 1256, which treats gains as a blend of short-term and long-term profits. However, futures trading involves significant leverage and requires a deep understanding of the market, making ETFs a more accessible and convenient option for most investors.
