Best Commodity ETFs for Diversification
Commodity ETFs track oil, metals, and agriculture prices. Here is what they cost, how they work, and whether you need them.
Don't have time? Here's what you need to know:
- 1Commodity ETFs use futures contracts and suffer from contango drag on returns
- 2PDBC is the best option for most investors: broad exposure with a simple 1099 tax form
- 3Commodities are optional — VTI + VXUS + BND covers most diversification needs
- 4Avoid single-commodity ETFs like USO — they are trading instruments with severe tracking costs
Commodity ETFs: More Complicated Than They Look
Commodity ETFs do not usually hold physical commodities (except gold and silver ETFs). Most use futures contracts — agreements to buy a commodity at a future date. This creates a drag called 'contango cost' when the futures price exceeds the spot price. Over time, this drag can significantly reduce returns compared to the actual commodity price.
DBC (Invesco DB Commodity Index) and GSG (iShares S&P GSCI) are the two broadest commodity ETFs, holding futures on oil, natural gas, gold, silver, corn, soybeans, and other raw materials. PDBC is a tax-efficient alternative that issues a 1099 instead of a K-1 (which simplifies tax filing).
Best Commodity ETFs Compared
PDBC is the best choice for most investors: broad commodity exposure with a simple 1099 tax form. DBC delivers slightly better returns but generates a K-1 tax form that complicates your filing. GSG is energy-heavy and more volatile.
| ETF | Coverage | Expense Ratio | Tax Form | 5-Year Return | Top Commodities |
|---|---|---|---|---|---|
| PDBC | Broad commodities | 0.59% | 1099 (simple) | ~8% | Oil, gold, copper, soybeans |
| DBC | Broad commodities | 0.85% | K-1 (complex) | ~9% | Oil, gold, wheat, corn |
| GSG | Broad commodities | 0.75% | K-1 (complex) | ~7% | Energy-heavy |
| GLDM | Physical gold only | 0.10% | 1099 | ~10% | 100% gold |
| USO | Crude oil only | 0.60% | K-1 | Volatile | WTI crude oil futures |
Commodities Are Optional and Complicated
Commodities have historically delivered lower returns than stocks and bonds. Their value is diversification — commodity prices often move independently of stock and bond prices. During 2022, commodities gained while stocks and bonds both fell. But over 20-year periods, a portfolio with commodities has not consistently outperformed one without them.
For most beginners, skip commodity ETFs entirely. A portfolio of VTI + VXUS + BND covers your needs. If you want inflation protection, TIPS are simpler and cheaper. If you specifically want commodity exposure, keep it under 5% and use PDBC for tax simplicity.
Important: Single-commodity ETFs like USO (crude oil) are extremely volatile and suffer from severe contango costs. USO lost 80% in 2020. These are trading instruments, not investments.
Ready to invest? Open an IBKR account in 10 minutes and get free stock. $0 commissions on US ETFs • Fractional shares from $1 • 150+ global markets.
Frequently Asked Questions
What is a K-1 tax form and why does it matter?
A K-1 reports income from a partnership structure. Many commodity ETFs issue K-1s, which arrive late (often after April 15), require extra tax filing steps, and may trigger state tax obligations in multiple states. PDBC avoids this by using a different structure that issues a standard 1099.
Do commodity ETFs track actual commodity prices?
Roughly, but not perfectly. Futures-based ETFs suffer from roll costs (contango) that create a drag over time. You might see oil prices rise 20% over a year while USO only rises 12%. This tracking error is an inherent cost of commodity ETFs.
Are commodity stocks better than commodity ETFs?
Energy stocks (XLE) and mining stocks (GDX) give you commodity exposure through equities instead of futures. They pay dividends, avoid contango costs, and issue simple 1099s. The trade-off: they correlate more with the stock market than with actual commodity prices.
Further Reading
Free Tools
Alex Harrington
CFA Level II Candidate, Finance & Economics
Alex Harrington is an independent ETF researcher and personal finance writer with over 8 years of experience analyzing exchange-traded funds. A CFA Level II candidate with a background in economics, Alex has reviewed 800+ ETFs and helped thousands of beginners build their first investment portfolios through clear, jargon-free education.
This content is for educational purposes only and does not constitute financial advice. Past performance does not guarantee future results. Consult a licensed financial advisor before making investment decisions.