Commodity ETFs: How to Invest in Gold, Oil, and More
Commodity ETFs give you exposure to oil, gold, and agriculture. But futures-based funds have hidden costs. Here is what to know.
Don't have time? Here's what you need to know:
- 1Physical commodity ETFs (GLD, GLDM) track prices accurately; futures-based (DBC, USO) have 1-10% annual tracking drag
- 2Contango and roll costs are hidden expenses that erode futures-based commodity ETF returns
- 3Most portfolios do not need commodity ETFs — VTI + BND covers the essentials
- 4If adding commodities, keep under 5% and prefer GLDM (gold, physical) or PDBC (broad, 1099 tax form)
Two Types: Physical and Futures-Based
Physical commodity ETFs hold the actual commodity. GLD holds gold bars in vaults. SLV holds silver. You own a claim on physical metal. These track commodity prices accurately because the fund literally owns the asset.
Futures-based commodity ETFs hold futures contracts — agreements to buy a commodity at a future date and price. DBC, PDBC, and USO use this approach. Futures-based funds do not track commodity prices perfectly because of contango (futures price > spot price) and roll costs (selling expiring contracts and buying new ones at higher prices). This creates a persistent return drag.
The Hidden Cost of Futures-Based Commodity ETFs
Contango costs USO (crude oil) roughly 5-10% per year in tracking drag. Oil could rise 20% while USO rises only 10-15%. The gap is the roll cost. For broad commodity ETFs like DBC, the drag is smaller (1-3% per year) because they diversify across multiple commodities, some of which may be in backwardation (futures cheaper than spot — a positive for the fund).
| ETF | Commodity Type | Structure | Annual Tracking Drag | Expense Ratio |
|---|---|---|---|---|
| GLD | Gold | Physical | Minimal (~0.40%) | 0.40% |
| GLDM | Gold | Physical | Minimal (~0.10%) | 0.10% |
| SLV | Silver | Physical | Minimal (~0.50%) | 0.50% |
| PDBC | Broad Commodities | Futures | 1-3% | 0.59% |
| DBC | Broad Commodities | Futures | 1-3% | 0.85% |
| USO | Crude Oil | Futures | 5-10% | 0.60% |
Do You Need Commodity ETFs?
For most portfolios: no. Stocks (VTI) provide long-term growth. Bonds (BND) provide stability. Commodities add complexity and tracking costs without consistently improving returns. The 2022 exception (commodities surged while stocks fell) is the kind of once-a-decade event that looks great in hindsight but is impossible to time.
If you want commodity exposure: GLDM for gold (0.10%, physical, minimal tracking cost) or PDBC for broad commodities (0.59%, futures-based but with 1099 tax form instead of K-1). Keep the allocation under 5%.
Tip: Energy stocks (XLE) give you commodity exposure through profitable companies rather than volatile futures contracts. If you want oil exposure, XLE may be a better vehicle than USO.
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Frequently Asked Questions
Why did USO lose 80% in 2020?
Oil futures went negative in April 2020 (producers paying buyers to take oil) combined with severe contango. USO was forced to roll contracts at massive losses. The ETF eventually changed its strategy to avoid front-month contracts — but the structural problems persist.
Is gold a good portfolio addition?
Gold has returned about 1% per year after inflation over the long term — it preserves purchasing power but does not grow it. A 3-5% gold allocation (GLDM) provides crisis insurance. More than 10% drags on long-term portfolio returns.
Physical or futures-based: which is better?
Physical (GLD, GLDM, SLV) for metals — minimal tracking drag, direct ownership. For broad commodities (oil + metals + agriculture), futures-based is the only option (PDBC, DBC) — but accept the 1-3% annual tracking cost as the price of access.
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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.