Commodity ETFs and ETCs give investors access to raw materials like gold, oil, natural gas, silver, or agricultural products. They are popular for diversification, inflation protection, and tactical investing — but they also come with unique risks that differ significantly from stock and bond ETFs. This article explains how commodity ETFs and ETCs work, the differences between them, and what you must understand before investing.
What Are Commodity ETFs and ETCs?
Most investors assume commodity ETFs work like equity or bond ETFs — but that’s not the case.
Commodity ETFs
These aim to track a commodity index or a basket of commodities. Often used for broad exposure (e.g. energy, agriculture, metals).
Commodity ETCs
ETCs (Exchange-Traded Commodities) track single commodities, such as:
- Gold
- Silver
- Oil
- Natural gas
Because commodities cannot be held directly in a traditional fund structure, most single-commodity products must be packaged as ETCs, not ETFs. Important: In Europe, most single-commodity products are ETCs, not ETFs, due to regulatory requirements.
How Commodity ETFs/ETCs Work
Unlike equity ETFs, commodity products track raw materials that cannot always be stored, held, or traded easily.
Therefore, they use two main structures:
Physically Backed Products (mostly precious metals)
Used for:
- gold
- silver
- platinum
- palladium
These ETCs hold physical metal in secure vaults.
Advantages
- simple to understand
- no complex derivatives
- tracks spot price closely
Risks
- storage costs reduce returns
- still technically unsecured debt instruments (ETCs, not funds)
Futures-Based Products (most commodities like oil, gas, wheat)
These products buy futures contracts instead of physical goods.
Why?
You cannot store or transport:
- barrels of oil
- tons of natural gas
- agricultural products
as easily as metal.
How it works
The ETC rolls from one futures contract to the next — this leads to roll yield, which can be positive or negative.
This is crucial for understanding performance.
Understanding Roll Yield (The Hidden Driver of Returns)
Roll yield impacts futures-based commodity products more than the spot price.
There are two scenarios:
Contango (negative roll yield)
The next futures contract is more expensive than the current one.
The ETC must “roll up,” losing value each month.
Common in:
- oil
- natural gas
- agricultural products
Result:
Long-term performance may be poor even if commodity spot prices are stable.
Backwardation (positive roll yield)
The next futures contract is cheaper than the current one.
The ETC rolls down and gains value.
Common in:
- certain metals
- some energy markets during shortages
Result:
Better performance than spot price under certain conditions.
Benefits of Commodity ETFs/ETCs
1. Diversification
Commodities behave differently from stocks and bonds.
2. Inflation Hedge
Raw materials often rise when inflation increases.
3. Easy Access
No need for futures trading or physical storage.
4. Tactical Opportunities
Useful for short- to medium-term themes (e.g., energy shortages).
Risks of Commodity ETFs/ETCs
Commodity products come with unique risks:
1. Futures-related losses (roll yield)
The biggest hidden risk for long-term investors.
2. High volatility
Oil, gas, and agricultural commodities can swing violently.
3. Structural issues
ETCs are debt instruments — not funds.
4. No long-term upward trend
Unlike stocks, commodities do not grow earnings.
Long-term returns are unpredictable.
5. Currency exposure
Commodities are priced in USD — this adds exchange-rate risk.
Who Should Consider Commodity ETFs/ETCs?
Commodity products can make sense for:
- tactical investors looking for short-term exposure
- inflation-sensitive portfolios
- risk-diversified portfolios
- investors adding precious metals as a defensive position
- advanced investors aware of futures mechanics
They are not ideal as long-term core investments.
Precious Metals: The Most Popular ETC Category
Gold, in particular, is widely used as:
- a safe-haven asset
- an inflation hedge
- a store of value
Physically backed gold ETCs are the simplest and most stable commodity products.
Summary
Commodity ETFs and ETCs provide access to raw materials but work differently from stock and bond ETFs.
It’s essential to understand futures, roll yield, volatility, and risks before investing.
Used thoughtfully, they can enhance diversification — but they should not form the core of a long-term portfolio.