Commodities exchange traded funds (ETFs) can be intimidating to many investors because they sometimes deal in futures contracts and can be riskier than other ETFs. Futures-based commodities ETFs can run into contango and backwardation issues that can affect their performance. However, the nice part of futures-based ETFs is that it bundles them together rather than investing in one individual futures contract, or trying to create your own futures portfolio.

In addition to investing in futures contracts, commodities ETFs can invest in a single commodity, such as gold, or it can be a broad-based commodity ETF, meaning it invests in many different kinds of commodities. There’s no right or wrong approach to commodities ETFs, it depends on what fits with investors’ personal financial portfolios. In general though, the broad-based commodities ETFs tend to offer more diversification because they have a variety of holdings. One such fund is the iPath Dow Jones-AIG Commodity Index Total Return ETN (DJP). This exchange traded note (ETN) offers excellent diversification because there’s little correlation between its performance and other sector-based ETFs’ performance, such as bonds. However, it does have a slight correlation with the iShares MSCI EAFE Index (EFA) that Gary Gordon for ETF Expert notes.

Some other broad-based commodities ETFs to consider include:

  • GS Connect S&P GSCI Enhanced Commodity Total Return Strategy Index ETN (GSC)
  • iShares S&P GSCI Commodity-Indexed Trust ETF (GSG)
  • iPath S&P GSCI Total Return Index ETN (GSP)
  • PowerShares DB Commodity Index Tracking Fund ETF (DBC)

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.