How to invest in commodities
For many investors, the most practical and cost-effective route into commodities is through exchange-traded funds. A common approach is broad-based commodity ETFs, which spread exposure across multiple commodity types, reducing the impact of any single price move.
These three are the cheapest commodity ETFs on the market according to justETF. When seeking to use commodities as a portfolio diversifier and inflationary hedge, the aim is to protect your capital, and therefore the priority may not be which ETFs generate the highest returns, but the ones that offer this risk protection at the lowest cost.
L&G All Commodities UCITS ETF
The L&G All Commodities UCITS ETF is currently the most cost-efficient way to gain broad commodity exposure, carrying the lowest total expense ratio of the three at just 0.15% per annum.
Managed by Legal & General Investment Management, a FTSE 100 stalwart and one of the UK’s largest asset managers, this ETF tracks a diversified basket of commodities spanning energy, metals and agricultural products. For investors seeking a single, low-maintenance instrument to hedge against inflation or diversify away from equities and bonds, this fund is one of the more popular choices.
Its broad exposure means no single commodity dominates performance, smoothing out the volatility that comes with investing in individual raw materials. The ultra-low fee structure is particularly significant when compounding over the long term, as even a small difference in annual charges can translate into better returns over a decade or more of holding.
Invesco Bloomberg Commodity UCITS ETF Acc
The Invesco Bloomberg Commodity UCITS ETF (GBp) tracks the Bloomberg Commodity Index, one of the most widely followed commodity benchmarks in the world, covering energy, grains, industrial metals, precious metals, softs and livestock.
The ‘Acc’ designation indicates that any income generated is accumulated within the fund rather than distributed to investors, making it a tidy option for those focused on long-term growth rather than regular income. At 0.19% per annum, its expense ratio sits fractionally above the L&G offering but remains competitive for the breadth of exposure it provides.
Invesco is a globally recognised asset manager with significant expertise in passive investing, lending credibility and operational strength to this fund. Investors who want a rules-based, index-driven approach to commodities, without the complexity of rolling futures contracts themselves, may find this ETF a straightforward solution.
iShares Diversified Commodity Swap UCITS ETF
The iShares Diversified Commodity Swap UCITS ETF (USD), issued by BlackRock under its market-leading iShares range, takes a synthetic approach to commodity exposure, using swap agreements rather than holding physical assets or futures contracts directly.
This structure can offer certain tax and operational efficiencies, though investors should be comfortable with the counterparty risk that comes with swap-based replication (and should take care to check the tax rules in their jurisdiction before investing).
Matching the Invesco fund on cost at 0.19% per annum, it remains another competitively priced option within the commodity ETF world. The ‘diversified’ label reflects its spread across multiple commodity sectors, reducing concentration risk compared to single-commodity products.
BlackRock’s scale and reputation may also provide a degree of reassurance around fund governance and liquidity. For investors already familiar with the iShares ecosystem, perhaps holding equity or bond ETFs from the same range, this fund offers a convenient way to round out a diversified multi-asset portfolio with commodity exposure.
Considering an allocation?
In general, portfolio theory supports keeping commodity exposure as a meaningful but measured portion of a diversified portfolio.
Most practitioners suggest a range broadly calibrated to risk appetite:
- A conservative allocation of 3% to 5%, focused primarily on gold or a broad commodity ETF, provides inflation protection without introducing significant volatility.
- A moderate allocation of 5% to 10%, using a mix of broad-based and sector-specific ETFs, adds more diversification across the economic cycle.
- A more aggressive position of up to 15%, potentially incorporating futures-based instruments and commodity producer equities, maximises the diversification and inflation-hedge benefits but comes with substantially higher volatility and may require active monitoring.
The right allocation depends on your existing holdings, investment horizon, inflation expectations and risk tolerance. The key point is that commodities are often viewed as valuable as a component of a broader portfolio strategy, not as a standalone bet on price direction.
Though there are professional investors who only invest in this sector, ignoring equities and bonds altogether.