Commodity ETFs and ETCs

Commodities are generally raw materials and can be grouped into energy (e.g. crude oil, natural gas), metals (e.g. gold, aluminium, copper) and agricultural commodities (e.g. corn, cotton, live cattle).

Commodity indices typically measure commodity futures performance. Futures are contracts to receive (or deliver) commodities at a specified future date and price. 

Direct (physical) investing in many commodities is challenging for many reasons, e.g. cost of storage, delivery, and so on. So, by investing in futures contracts, you can gain exposure to commodities without having to own the physical underlying asset and the difficulties that come with it.

As measured by inflation beta² from 1998 to 2022, commodities are historically the most efficient hedge for inflation of any major asset class, even when compared to common inflation-fighting instruments, like Treasury Inflation-Protected Securities (TIPS) ³, real estate investments trusts (REITs) ⁴, and gold.⁵ This is because commodities are raw materials used as inputs in housing, transportation and food – all components of the CPI. In addition, inflation shocks are usually the by-product of stronger-than-expected demand and/or supply uncertainty, all of which may boost the price of goods.

Given the global reach of commodities, commodity prices have many drivers. However, some of the key influencing factors include:

• Global economic health: The health of the global economy can directly impact the supply and demand of commodities, influencing prices. In particular, developments in China and the US often have an outsized influence as they are the world’s two largest global economies by gross domestic product (GDP), which measures the total value of a country's finished goods and services
• Green transition and climate volatility: Contrary to popular belief, the energy transition/decarbonisation trend is supportive of commodity prices. Metals like copper, aluminium, zinc and nickel are playing a significant role in the transition to renewable energy, yet efforts to reduce carbon emissions are significantly constraining supplies. This combination of growing demand and tightening supply could potentially create sustained global deficits in the metals sector for years — possibly decades — to come. The growing application of environmental, social, and governance (ESG) considerations in investment solutions has also led to significant underinvestment in fossil fuels, such as oil and gas, stunting supply growth while global demand continues to climb. Extreme weather events may continue to upend supplies in the agricultural sector. Furthermore, there may be increased demand for agricultural commodities to be used as ‘energy crops’ for ethanol and biodiesel.
• Geopolitics: Rising geopolitical tension, especially between significant players in this market, can lead to heightened uncertainty and volatility for prices, as we saw play out following Russia’s invasion of Ukraine. Tensions between the US and China have also been rising, which could potentially rewrite existing global trade routes.

Greenhouse gases (GHG) are naturally occurring gases in the atmosphere, which absorbs and re-emits heat, contributing to the warming of the earth. Examples include carbon dioxide and methane. Carbon is a chemical element that is present in many, but not all, greenhouse gases. For the purposes of analysing what investors understand as the ‘carbon footprint’ of a commodity portfolio, GHG emissions data provides a representative metric. 

These are physically backed exchange traded certificates (ETCs) that can be bought and sold on exchange. Certificates in the ETCs are a type of debt instrument and are secured by a pool of collateral (the underlying precious metal), which is held on trust by the trustee for itself, the certificate holders and other parties.