Top Commodity ETFs in Canada 2024

Higher-than-forecasted inflation in 2022 pummelled both stocks and bonds, but one asset class stood out: commodities. The price of real assets like soybeans, wheat, corn, crude oil, natural gas, copper, aluminum, lithium, gold, and silver shot up sharply thanks to demand shocks.

Historically, commodities have been a valuable addition to portfolios as a hedge against inflation given their status as inputs into inflation calculations. They also possess low correlation with other asset classes like stocks and bonds, which can help lower the overall risk in a diversified portfolio.

However, accessing commodities can be difficult for investors given the cost of physically storing commodities or trading futures. An alternative is to use commodities exchange-traded funds (ETFs) that provide access to broad commodities or specific ones.

What is a commodity ETF?

A commodity ETF is an open-ended fund that holds a basket of underlying commodity assets. This ETF trades on exchanges like stocks, with shares representing a slice of that basket. When investors buy shares of a commodity ETF, they receive exposure to its underlying commodities.

Commodities ETFs can be broad or narrow in focus. Broad commodities ETFs hold a diversified basket of multiple commodities from various industries, such as base metals, energy, and agriculture. Narrow commodities ETFs focus on a single resource like crude oil or gold.

Commodity ETFs exposure

Commodities ETFs can gain exposure to commodity prices in one of two ways:

• Physical exposure: Some commodities like gold and silver can be held directly in secure storage long term. Commodities ETFs tracking these assets are therefore physically backed.
• Synthetic exposure: Resources like natural gas, crude oil, or soybeans are difficult to store long term. To gain exposure, commodities ETFs can use derivatives called futures contracts.

It is important to note that synthetic commodity ETFs do not track the real-time or spot price of the underlying commodity. Rather, they track the price of the current future contracts held. Because futures contracts expire periodically, commodity ETF managers have to “roll” them by selling the expiring one and buying the further dated ones.²

Sometimes, the later dated futures contracts may be trading at a premium compared to earlier ones. This is called contango, and it can cause commodity ETFs to incur a tracking error and even lose value when the futures contracts are rolled. Investors who buy synthetic commodities ETFs should be aware of this phenomenon if they plan on holding long term.

Finally, some commodities ETFs can provide leveraged or inverse exposure to commodity prices. These ETFs are considered advanced trading tools. They’re generally not suitable for beginner investors and can behave unpredictably if held longer than a single trading day.

Top Canadian Commodity ETFs

The following Canadian ETFs provide exposure to either broad or specific types of commodities, either synthetically via futures or by physically holding the commodity.

CI Auspice Broad Commodity ETF (TSX: CCOM)

CCOM tracks the Auspice Broad Commodity Excess Return Index, which holds futures contracts across energy, metals and agricultural commodities. Its current portfolio contains corn, cotton, soybean, sugar, wheat, crude oil, gasoline, heating oil, natural gas, copper, gold, and silver futures contracts.

Horizons Crude Oil ETF (TSX: HUC)

Investors looking for more concentrated exposure to oil prices can use HUC in lieu of Canadian oil and gas stocks. This ETF tracks the Solactive Light Sweet Crude Oil Winter MD Rolling Futures Index, which tracks monthly crude oil futures contracts. The ETF is hedged back to the Canadian dollar to minimize volatility from fluctuations in the USD-CAD exchange rate.

Horizons Natural Gas ETF (TSX: HUN)

Instead of buying Canadian natural gas stocks, investors can opt for HUN, which tracks the Solactive Natural Gas Winter MD Rolling Futures Index. Similar to HUC, HUN holds monthly natural gas futures contracts. HUN is also CAD-hedged to mitigate currency risk. 

iShares Gold Bullion ETF (TSX: CGL)

CGL provides exposure to the spot price of gold hedged to the Canadian dollar. Unlike the previous ETFs on this list, CGL actually holds physical bullion in 100 or 400 troy ounce international bar sizes. The ETF also comes in an unhedged version (CGL.C), which is affected by fluctuations in the USD-CAD exchange rate.

Pros of investing in commodity ETFs

After stocks, bonds and cash, commodities tend to be the fourth major asset class investors diversify their portfolios with. Here are some of the advantages of investing in commodity ETFs:

• Inflation hedge: Historically, commodities have outperformed equities as inflation rises, notably during 2022.
• Diversification: Commodities possess a low correlation to both stocks and bonds. By adding commodities to a stock and bond portfolio, investors can potentially lower risk without harming returns.
• Long-term returns: Commodities could outperform if we see another commodity super-cycle, which is a decade-long period of strong commodities performance.³

Cons of investing in commodity ETFs

• High volatility: Commodities ETFs have historically fluctuated in price more than equity and bond ETFs. The underlying commodities are sensitive to a wide range of inputs, which can affect their prices.
• Expensive: Commodities ETFs usually use derivatives, which can be costly. Even physical commodity ETFs like gold and silver ETFs charge higher expense ratios compared to equity ETFs.
• Tracking error: Due to the use of futures, the effects of contango can cause commodities ETFs to underperform their benchmarks.

Are commodity ETFs right for you?

Commodities ETFs are considered a fairly complex investment best suited for intermediate investors who understand their risks. These ETFs tend to carry high expense ratios, incur greater than average volatility, and can behave contrary to expectations due to contango.

Commodities ETFs may be right for investors who are willing to accept these risks in exchange for an inflation hedge. For those seeking maximum diversification, an allocation to commodities ETFs can improve an existing portfolio of stocks, bonds, and cash due to its low correlation.