For many Australian investors, the idea of diversifying beyond shares , property, and bonds eventually leads to a consideration of commodities. These raw materials — like gold, oil, or wheat — have long played a role in global markets and can behave differently to traditional asset classes. That makes them interesting as potential portfolio diversifiers, particularly during periods of inflation, supply chain shocks, or geopolitical tension.
Yet for everyday investors, buying barrels of oil or storing bars of silver isn’t exactly practical. This is where exchange-traded funds (ETFs) come in. Commodity ETFs allow investors to gain exposure to commodities without having to handle the complexities of futures contracts or physical storage.
In this article, we’ll explore what commodities are, why some investors consider them, the structures of commodity ETFs, and examples available on the Australian Securities Exchange (ASX).
What are commodities?
At their core, commodities are basic goods used in commerce that are largely interchangeable with others of the same type. They form the building blocks of the global economy.
Commodities are often divided into two categories:
- Hard commodities : These are natural resources extracted or mined, such as metals (gold, silver, copper) and energy products (oil, coal, natural gas).
- Soft commodities : These are agricultural products like wheat, coffee, cotton, or livestock.
Throughout history, commodities have served as both essential economic inputs and stores of value. Gold , for instance, has been used for thousands of years as a form of money and wealth preservation. Oil, meanwhile, underpins modern energy systems, making it vital for global industry.
Why do investors consider commodities?
Commodities appeal to some investors for several reasons, though they come with notable trade-offs.
1. Diversification
Commodities often move differently compared to equities and bonds. For example, when stock markets are under stress, gold has sometimes risen in value as investors seek safe havens. This low correlation can make commodities a useful diversifier within a broader portfolio.
2. Inflation hedge
Prices of commodities tend to rise when inflation increases, as raw materials themselves become more expensive. Historically, gold and energy products have been viewed as hedges against inflation.
3. Exposure to global trends
Investing in commodities provides exposure to large-scale economic forces. For instance, demand for copper often rises with industrial growth and renewable energy expansion, while agricultural prices can reflect population growth and climate pressures.
4. Risks and drawbacks
Despite these potential benefits, commodities are volatile and highly sensitive to global events. Wars, weather disruptions, and policy shifts can all move prices sharply. Unlike equities or bonds, commodities generally do not generate income — there are no dividends or interest payments. This means returns rely solely on price appreciation.
How ETFs provide access to commodities
Directly investing in commodities is not straightforward for individual investors. Purchasing physical gold involves secure storage and insurance, while trading oil futures requires specialist knowledge and margin accounts.
Commodity ETFs can simplify access by packaging exposure into a familiar, tradeable unit on the ASX. That said, not all commodity ETFs are structured the same way. The main types are:
1. Physically backed ETFs
These funds hold the underlying commodity itself, typically in secure vaults. A gold ETF, for instance, may store bullion bars that correspond to units held by investors. Physically backed ETFs aim to closely track spot prices of the commodity.
2. Futures-based ETFs
Rather than holding the commodity directly, these funds invest in futures contracts. Futures are agreements to buy or sell a commodity at a set price in the future. This structure is often used for oil, gas, or diversified commodity baskets. While practical, futures ETFs may not perfectly track spot prices due to “roll costs” when contracts are renewed.
3. Equity-based ETFs
These funds invest in companies involved in commodity production — such as mining firms or energy producers — rather than the commodities themselves. Their performance is linked to company earnings, operational efficiency, and broader equity market trends, as well as underlying commodity prices.
Examples of commodity ETFs in Australia
The ASX hosts a variety of commodity ETFs that cater to different types of exposure. A few examples include:
-
Global X Physical Gold ETF (ASX: GOLD)
A physically backed fund holding gold bullion stored in secure vaults. It aims to mirror the Australian dollar price of gold, minus fees. -
BetaShares Commodities Basket ETF – Currency Hedged (ASX: QCB)
Provides diversified exposure to a basket of commodities via futures contracts. It includes energy, metals, and agricultural commodities, designed to track the broad Bloomberg Commodity Index. -
VanEck Global Mining ETF (ASX: MINE)
Invests in leading global mining companies across metals like copper, nickel, and lithium. Rather than tracking commodity spot prices, it provides exposure through the equity performance of miners. -
Global X Physical Silver ETF (ASX: ETPMAG)
Similar in design to GOLD, but focused on physical silver holdings. It tracks the local silver price, appealing to those seeking precious metal diversification. -
BetaShares Crude Oil Index ETF – Currency Hedged (ASX: OOO)
A futures-based ETF providing exposure to oil prices. Because oil cannot be held physically in a fund structure, the ETF uses futures to replicate movements in global crude benchmarks.
These examples are not recommendations, but illustrate the variety of structures and exposures available in the Australian market.
Where commodities fit in a portfolio
In many diversified portfolios, commodities are considered a “satellite” allocation rather than a core holding. Core exposures are often broad equity and bond funds, while commodities usually play a complementary role.
The potential roles for commodities include:
- Acting as a hedge against inflation or geopolitical risks.
- Providing diversification through low correlation with shares and bonds.
- Offering thematic exposure, such as investing in metals needed for renewable energy transitions.
However, overexposure can introduce risks. Commodities are cyclical, tied to supply and demand dynamics that can shift quickly. Prices can rise and fall sharply depending on global events, making concentrated allocations risky.
Key considerations before investing
Before adding commodity ETFs to a portfolio, investors often weigh several factors:
Liquidity and costs
Commodity ETFs can differ in size and trading activity. Lower liquidity may mean wider bid-ask spreads, making trades more expensive. Management fees also vary across ETF types.
ETF structure
Understanding whether the ETF is physically backed, futures-based, or equity-linked is essential, as this affects how closely it tracks commodity prices and what risks it carries.
Tax implications
Different commodities can have unique tax treatments. For example, physically backed gold ETFs may be treated differently from equity ETFs for capital gains purposes.
Market sensitivity
Commodities are influenced by global supply and demand, policy shifts, and geopolitical tensions. For instance, energy markets can move sharply on OPEC decisions or conflicts in oil-producing regions.
Conclusion
Commodities have long been a part of global trade and investment, and they continue to draw attention from investors seeking diversification, inflation protection, or exposure to specific economic trends.
For everyday Australian investors, ETFs offer the simplest way to access commodities — whether through physical holdings like gold, futures-based baskets of raw materials, or equity funds tied to miners and producers. Each approach carries unique risks, benefits, and costs.
Ultimately, whether commodities belong in a portfolio depends on an individual’s broader strategy, time horizon, and tolerance for volatility. What is clear is that commodity ETFs have made it easier than ever for investors to explore this once-specialised asset class.
