Best commodity ETFs to watch

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 increased interest rates and relatively 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.

Best ASX commodity ETFs to watch

These ETFs have been chosen as being prominent in their individual classes, though may not necessairly be the best choice. This is not investment advice.

1. BetaShares Global Energy Companies ETF
2. Perth Mint Gold
3. BetaShares Agriculture ETF (Currency Hedged, Synthetic)
4. Global X Battery Tech & Lithium ETF
5. Global X Physical Precious Metal Basket

BetaShares Global Energy Companies ETF

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 BetaShares Global Energy Companies ETF gives investors the opportunity to gain exposure to a diverse range of the world's largest oil and gas stocks, including Chevron, ExxonMobil and Shell. And because it employs a passive, index-tracking approach, this ETF can save costs for investors by dispensing with active management fees.

Oil historically has shown a low correlation to the other major asset classes, and can be useful in the diversification of one’s portfolio. However, oil prices are srongly correlated with global economic demand, and a widespread downturn could hurt this commodity ETF.

Perth Mint Gold

Perth Mint Gold gives investors exposure to the precious metal, without needing to buy, insure, and store physical bars. Gold remains popular in 2024 for many reasons; inflation, central bank activity, falling supply and increasing debt levels are all making the precious metal more attractive. Indeed, the metal remains at near record highs, with central banks around the world continuing to buy the precious metal at a record pace.

As a product that is fully underpinned by the government-backed gold of the Perth Mint, this ETF provides one of the most secure forms of exposure to bullion on the ASX. And with a management fee of just 0.15%, Perth Mint Gold also claims to be most cost-effective gold ETF on the index.

The ETF delivered a 12.56% return in 2023.

BetaShares Agriculture ETF (Currency Hedged, Synthetic)

The BetaShares Global Agriculture Companies ETF 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 previously saw 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.

Global X Battery Tech & Lithium ETF

Lithium stocks were hit hard in 2023 due to the collapsing lithium price — which sunk at least partially due to the cessation of Chinese state subsidies for EVs alongside increased supply.

However, the silvery alkali metal is a key ingredient in modern batteries, putting it on track for surging demand in future as low-carbon policies drive the popularity of electric vehicles. Indeed, Rio Tinto has forecast that lithium demand will rise by 945% over the next ten years, while AustralianSuper plans to double its exposure to local lithium stocks over the next five years.

The Global X Lithium ETF enables investors to gain exposure to a range of companies involved in lithium extraction as well as the related sectors of electric vehicles and battery technology. Top holdings include Albemarle and Mineral Resources,

Global X Physical Precious Metal Basket

The Global X Precious Metals Basket Trust 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 60.5% gold, 12.4% palladium, 21% silver, and 6.2% 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.

Many investors feel this ETF is less risky than investing purely in gold, though it's worth noting that gold has outperformed the other three metals in recent history.