Commodity Index ETFs: The Basket Approach To Commodities Investing

First off, what the heck is a commodity index ETF? The concept isn’t nearly as intimidating as it might appear at first glance. For starters, consider what some of the most popular commodities ETFs out there do. In the case of the SPDR Gold Shares (NYSE: GLD), investors get exposure to physical gold. The U.S. Oil Fund (NYSE: USO) is a play on oil futures contracts.

Those ETFs obviously track one specific commodity each. A commodity index ETF takes that approach a few steps further by tracking an index that is often comprised of multiple commodities, be they agriculture, energy or metals. In other words, a commodity index ETF is the perfect idea for the investor that knows he needs some commodities exposure, but just can’t decide on one specific commodity to devote his capital to.

Under The Hood With Commodity Index ETFs

Take the PowerShares DB Commodity Index Tracking ETF (NYSE: DBC) for example. This is one of the more liquid commodity index ETFs out there and on the surface, it might appear as though it would offer a play on multiple commodities. This isn’t a knock on DBC, but the ETF just isn’t as diverse as some would assume it is. DBC does offer basket exposure, but it is only to a variety of crude oil and natural gas contracts. In this case, it pays to look at the commodity index ETF’s holdings before pulling the trigger.

The same can be said of the PowerShares DB Agriculture Fund (NYSE: DBA). To be sure, DBA is a commodity index ETF, but its holdings are devoted primarily to coffee, sugar and cocoa futures while the name implies this is a broader play on soft commodities.

Commodity Index ETFs: A Heavy Focus On Energy

As we discussed with DBC, select commodity index ETFs can be heavily weighted to energy commodities. The iShares S&P Commodity-Indexed Trust (NYSE: GSG) is a prime example as that ETF devotes nearly 69% of its weight to energy commodities.

In other words, part of the allure of a commodity index ETF is gaining exposure to a broad swath of commodities, not just one or two. On that note, perhaps the best commodity index ETF out there in terms of diversity is the GreenHaven Continuous Commodity Index ETF (NYSE: GCC). GCC’s top-10 holdings offer exposure to wheat, cotton, copper, corn, sugar, gold and platinum, among others and that diversity is hard to beat.