ETFs have made investing in commodities cheap and easy for investors of every size and level of sophistication. Before ETFs, if investors wanted to invest in commodities, they had to open up a futures account, get approval from a broker, and maintain margin to cover any movements in the commodities contracts they were holding.
Investors interested in exposure to commodities, with 112 funds available, have a number of options to choose from. They range from physically backed single-commodity funds, such as the SPDR Gold Shares (GLD), to futures-based commodity baskets.
The two major types of commodity ETFs are (1) those that physically hold a given commodity and (2) those that use futures contracts to gain exposure to a commodity.
Physical commodity ETFs are simple: They store the commodity in a
vault somewhere, and each share represents a certain percentage of the stored commodity. Physical commodity ETFs are currently available only for the precious metals—gold, silver, platinum, and palladium—and baskets of them.
Futures-based commodity ETFs are both more prevalent than physical commodity ETFs (by number, if not by assets) and more complicated. These ETFs hold futures contracts linked to the targeted commodity. Futures contracts are agreements to buy the commodity in question at a future date.
Unlike equities, for which a number of standard benchmark indexes exist that everyone agrees generally represent the market as a whole, there is no consensus on what constitutes a commodity market portfolio.