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CFDs are complex financial instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money. CFDs are complex financial instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

Best commodity ETFs to watch

A brief explanation of ASX commodity ETFs, their advantages and setbacks, and a selection of the best to watch in Q3.

australia Source: Bloomberg

ASX commodity Exchange Traded Funds (ETFs) are popular investment vehicles which allow investors to gain exposure to the performance of selected hard and soft commodities with the same ease as purchasing any normal share on the ASX.

ASX commodity ETFs: what you need to know

Hard commodities are defined as natural resources which are usually mined or extracted from the ground, such as oil, gold, or copper. Soft commodities are grown and usually require maintenance during production, such as livestock, wheat, or sugar.

Commodities underpin the economic system in a fundamental way; every share on the ASX ultimately generates profit through the commodity chain.

Commodity ETFs give investors an excellent advantage in that they provide significant diversification in a portfolio. This is because commodities’ performance historically demonstrates a low correlation with other major asset classes, such as cash, fixed income, or international and Australian equities.

For example, gold has long been viewed as a recession-proof 'safe haven’ real asset inflation-hedge. But for practical reasons, it makes far more sense to buy into a gold ETF rather than take delivery of physical bars.

In an era of rising interest rates and elevated inflation, investors who have diversified through the best ASX commodity ETFs have enjoyed a reasonable level of portfolio protection through 2023. For perspective, many commodities have surged over the past year.

Why invest in ASX commodity ETFs?

Investing directly in commodities futures can be both impractical and expensive. There’s even the occasional report of a trader who has forgotten to close a futures position who is forced to take physical delivery of a commodity.

Further, futures themselves are relatively complex, typically have large contract sizes, come with margin demands, and include a component of open-ended risk that needs to be covered by the trader. This can make them unattractive to some retail investors, especially those without starting their investing journey.

By contrast, an ASX commodity ETF allows investors to gain exposure to this useful asset class without the drawbacks.

Most commonly, they track a benchmark index which either measures the price of a single commodity or a basket of multiples commodities. Most are synthetic ETFs which track commodity futures, and therefore may perform better or worse than the spot price of the commodity itself.

Of course, some ASX commodity ETFs will directly invest. A common example of this is the currency hedged BetaShares Gold Bullion ETF (ASX: QAU), which is backed by physical gold held within a JP Morgan Chase vault in London. However, this is the exception, rather than the rule.

Of course, this is just a very brief overview of ASX ETFs. Further information can be found here.

asx 200 Source: Bloomberg

Best ASX commodity ETFs

1. BetaShares Crude Oil Index ETF, (Currency Hedged, Synthetic)

The BetaShares Crude Oil Index ETF (OOO) aims to track the performance of an oil index which provides exposure to the price of West Texas Intermediate (WTI) crude oil futures, hedged for currency exposure.

Demand for oil has soared over the past few years, driven by western sanctions against Russian oil in the wake of the Ukraine war, post-pandemic economic demand, OPEC+ production cuts, and now geopolitical uncertainty in the Middle East.

The advantage of the ETF is its simplicity, as investors can access the performance of crude oil futures without investing in the futures market or having to physically store any oil. Oil historically has shown a low correlation to the other major asset classes, and is particularly useful in the diversification of one’s portfolio.

Further, OOO’s currency hedging means that investors experience pure exposure to oil futures rather than having that exposure muddied by the strengthening US dollar.

2. BetaShares Gold Bullion ETF (Currency Hedged)

The BetaShares Gold Bullion ETF (QAU) is backed by physical gold bullion, and aims to track the spot price of gold, hedged for currency movement in the AUD/USD exchange rate.

The ETF is popular for investors wishing to gain exposure to the performance of gold, especially as the global recession approaches — the metal is at a near-record high — without needing to buy, insure, and store physical bars. Gold remains popular in 2023 for many reasons; inflation, central bank activity, falling supply and increasing debt levels are all making the precious metal more attractive.

As previously noted, QAU is unlike many of the best ASX commodity ETFs, as it is backed by physical bullion, and investors can view the gold bar list directly on the BetaShares website.

3. Global X Physical Precious Metal Basket

The Global X Precious Metals Basket Trust (ETPMPM) allows investors to provide a return equivalent to the movements in the spot prices of its four precious metals, which are backed by physically allocated metal held by HSBC Bank USA.

For clarity, ETPMPM currently divides its investments into 47.19% gold, 30.86% palladium, 15.91% silver, and 6.02% platinum. The ETF remains a popular choice as it allows investors to further diversify their portfolios within one fund, which is fully backed by physical commodities, and doesn’t suffer the pricing divergences associated with futures.

Platinum and palladium inclusion has been particularly beneficial as both prices have spiked in recent months. In addition, many investors feel this ETF is less risky than investing purely in gold.

4. BetaShares Agriculture ETF (Currency Hedged, Synthetic)

The BetaShares Global Agriculture Companies ETF (FOOD) aims to track the performance of an index which comprises the largest global agriculture companies (excluding Australia) throughout the world, hedged into Australian dollars. Top holdings include Deere, Corteva, and Archer-Daniels-Midland.

The ETF is popular as growing populations and rising living standards continue to increase the demand for higher quality food, and just food in general. In addition, it allows investors to significantly diversify away from the mining and financials-heavy ASX 200, with no active manager fees through its passive index-tracking approach.

Summer heatwaves and the Ukraine war have seen sharp rises in commodities like wheat and corn compared to historical averages, and further uncertainty in the Middle East is also creating further supply chain uncertainty. And with long-term climate change expected, FOOD could see rises in the future.

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This information has been prepared by IG, a trading name of IG Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
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