ASX commodity Exchange Traded Funds (ETFs) are popular investment vehicles that allow investors to gain exposure to the performance of selected hard and soft commodities with the same ease as purchasing any normal share on the ASX.
ASX commodity ETFs: what you need to know
Hard commodities are defined as natural resources which are usually mined or extracted from the ground, such as oil, gold, or copper. Soft commodities are grown and usually require maintenance during production, such as livestock, wheat, or sugar.
Commodities underpin the economic system in a fundamental way; every share on the ASX ultimately generates profit through the commodity chain.
Commodity ETFs give investors an excellent advantage in that they provide significant diversification in a portfolio. This is because commodities’ performance historically demonstrates a low correlation with other major asset classes, such as cash, fixed income, or international and Australian equities.
For example, gold has long been viewed as a recession-proof ‘safe haven’ real asset inflation-hedge. But for practical reasons, it makes far more sense to buy into a gold ETF rather than take delivery of physical bars.
In an era of rising interest rates and rising inflation, investors who have diversified through the best ASX commodity ETFs have enjoyed a reasonable level of portfolio protection through 2022.
For perspective, while almost every major index is in a bear market right now, many commodities have surged to record or near-record highs since the start of the year.
Why invest in ASX commodity ETFs?
Investing directly in commodities futures can be both impractical and expensive. There’s even the occasional report of a trader who has forgotten to close a futures position who is forced to take physical delivery of a commodity.
Further, futures themselves are relatively complex, typically have large contract sizes, come with margin demands, and include a component of open-ended risk that needs to be covered by the trader. This can make them unattractive to some retail investors, especially those without starting their investing journey.
By contrast, an ASX commodity ETF allows investors to gain exposure to this useful asset class without the drawbacks.
Most commonly, they track a benchmark index which either measures the price of a single commodity or a basket of multiples commodities. Most are synthetic ETFs which track commodity futures, and therefore may perform better or worse than the spot price of the commodity itself.
Of course, some ASX commodity ETFs will directly invest. A common example of this is the currency hedged BetaShares Gold Bullion ETF (ASX: QAU), which is backed by physical gold held within a JP Morgan Chase vault in London. However, this is the exception, rather than the rule.
Of course, this is just a very brief overview of ASX ETFs.
Here is a list of five of the best commodity ETFs on the ASX right now, for investors to consider if they are seeking exposure to the asset class.
1. BetaShares Global Agriculture Companies ETF (ASX: FOOD)
2. BetaShares Gold Bullion ETF (ASX: QAU)
3. VanEck Vectors Australian Resources ETF (ASX: MVR)
4. BetaShares Crude Oil Index ETF (ASX: OOO)
5. Global X Copper Miners ETF (ASX: WIRE)
1. BetaShares Global Agriculture Companies ETF (ASX: FOOD)
The BetaShare Global Agriculture Companies ETF makes investments in some of the world’s largest global agriculture companies, including crop producers, seed and fertilizer companies, farm machinery manufacturers, and livestock producers.
The ETF provides diverse exposure to companies across the agricultural value chain. Investors can use this ETF to capitalise upon the long-term growth potential of the agriculture sector, particularly given demographic projections for further global population growth.
2. BetaShares Gold Bullion ETF (ASX: QAU)
This ETF is designed to provide investors with exposure to the performance of gold via direct investment in physical bars of the precious metal.
Each unit of the fund represents a fixed volume of gold that is held in a vault of JP Morgan Chase in London. The BetaShares’ website enables investors to view the gold bar list whenever they wish.
For retail investors, the ETF provides a simple and convenient way to invest in gold, which is still considered by many to be one of the most effective hedges against inflation and enduring stores of value.
3. VanEck Vectors Australian Resources ETF (ASX: MVR)
This ETF gives investors exposure to the largest resource companies listed on the ASX, including mining, energy, and metal companies.
It seeks to track the performance of the largest and most liquid ASX-listed companies, deriving at least half of their revenues or assets from the Australian resources sector.
MVR follows the MVIS Australia Resources Index, which is a market-cap-weighted index that includes companies with a minimum market capitalization of AUD$150 million.
4. BetaShares Crude Oil Index ETF (ASX: OOO)
This ETF provides investors with exposure to the spot price for crude oil using swap agreements and futures.
The fund tracks the performance of the S&P GSCI Crude Oil Index and is hedged to minimize the impact of AUD/USD exchange rate fluctuations on returns – an important feature for investors in ASX-listed equities.
OOO provides investors with a convenient means to take a bullish position on oil, should they expect demand for the key energy resource to rise further in future.
5. Global X Copper Miners ETF (ASX: WIRE)
WIRE is the first ETF of its kind to list on the ASX, providing investors with access to a ‘global basket of copper miners’ alongside semi-annual dividends.
Given its importance as an industrial metal, demand for copper is closely tied to global economic growth and the manufacturing of electrical goods.
For this reason, copper-related securities provide investors with an effective means of taking positions on upturns in the international business cycle.
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