The Benefits of Equity Commodity ETFs

by: Tom Lydon

The beauty of commodity exchange traded funds is that you have multiple ways to get your exposure. You can buy funds that hold futures contracts, funds that are physically backed or funds that hold the stock of commodity producers. Each type has its benefits and drawbacks.

Equity-based commodity ETFs are funds that hold mining companies and other companies involved in the production of various commodities. Be aware that the performance of these companies are not always correlated to their underlying commodity. In the case of coal, steel and other commodities, sometimes equity-based commodity ETFs are the only way to gain exposure to these assets in an ETF. [Agriculture ETFs Could Grow After Spring Rains.]

ETFs that hold the stock of companies that mine, explore and produce commodities have a variety of benefits:

  • There’s no need to be an expert on any given commodity; the person running the company will do that for you. It’s incumbent upon them to know more than just about anyone else. [The Benefits of Hard Asset Equity ETFs.]
  • There’s less volatility in these funds. They’re not as sensitive to day-to-day price movements in various commodities because their focus is all about the big picture.
  • When commodity prices are far above the cost of production, price declines aren’t as imminently troublesome. [How Metals ETFs Changed Investing.]
  • ETFs that hold futures contracts or physical commodities are treated differently, tax-wise. Long-term capital gains rate on equity-based ETFs is 15%, but be sure to consult your tax professional for further guidance. [Where Oil Prices May Be Headed.]

But there are drawbacks, too:

  • Like any other company, these firms can have things go wrong, including mismanagement, corruption, environmental disasters, labor strikes, lawsuits and more.
  • Companies also hedge their exposure to commodity price oscillations by using futures contracts to lock in in prices, which means that the company may not benefit if commodity prices rise.

Among the growing number of equity-based commodity ETFs include:

  • SPDR S&P Metals & Mining (NYSEARCA:XME)
  • SPDR S&P Oil & Gas Exploration & Production (NYSEARCA:XOP)
  • Market Vectors Gold Miners Fund (NYSEARCA:GDX)
  • Market Vectors Steel Index ETF Fund (NYSEARCA:SLX)
  • Market Vectors RVE Hard Assets Producers Index (NYSEARCA:HAP)
  • PowerShares Global Coal (NASDAQ:PKOL)
  • PowerShares Dynamic Energy Exploration and Production (NYSE:PXE)
  • iShares Dow Jones U.S. Oil & Gas Exploration & Production (BATS:IEO)
  • First Trust ISE Global Copper (NASDAQ:CU)
  • First Trust ISE Global Platinum (NYSEARCA:PLTM)