In an evolving landscape of investment options, commodities occupy a unique space. Unlike stocks and bonds, which represent ownership of equity or debt in companies, commodities are physical goods – the building blocks of our world.
The ingredients of our everyday lives
Commodities are basic, interchangeable goods traded on global exchanges that can be divided into the following categories (Table 1).
Table 1. Commodity categories
The value of a commodity is determined by supply and demand dynamics, along with factors like geopolitical tensions, weather patterns, global economic growth, and investor appetite. Unlike company stocks, commodities don't pay dividends, but their price fluctuations offer potential for capital appreciation.
Commodities, from the coffee that fills our mugs to the oil that fuels our cars to the wheat that fills our bread baskets, play a crucial role in the global economy. But how do they translate into a viable asset class for investors?
A critical aspect of asset allocation
Commodities offer several advantages that make them attractive to investors:
Diversification1
Commodities often exhibit a low correlation with traditional stocks and bonds. This means that when stocks and bonds struggle, commodities might perform well, and vice versa. This diversification benefit may help reduce overall portfolio risk.
Inflation hedge2
Historically, commodity prices tend to rise with inflation, as they are often the source of that inflation. During economic expansions, demand for raw materials rises as output rises. Owning commodities may act as a hedge against inflation, protecting your purchasing power.
Tangible asset
Unlike some financial instruments, commodities represent real, physical goods. This tangibility may be appealing to investors seeking a hedge against market volatility or currency fluctuations.3
A time of transition
The current commodity market is experiencing a period of significant flux. Here are some key trends shaping the landscape:
Geopolitical tensions
The commodity market is currently experiencing significant changes, driven by a complex interplay of global economic factors, geopolitical tensions, and shifting supply and demand dynamics. This asset class has been susceptible to recent world events and macroeconomic trends.
The ongoing geopolitical tensions in various regions are among the most prominent factors shaping the commodity landscape. The Russia-Ukraine conflict has far-reaching implications, especially for energy, metals, and grain markets. Russia's position as a major oil and natural gas exporter has led to supply disruptions and price volatility in these sectors. Similarly, Ukraine's role as a significant grain exporter has been compromised, leading to concerns about global food security and pushing up prices for wheat, corn, and other staples.
Tensions surrounding Israel and Iran, as well as conflicts in other parts of the region, have contributed to uncertainty in Middle Eastern oil markets.4 Any disruption to oil flow through maritime channels, such as the Suez Canal or Strait of Hormuz, could significantly impact global energy prices.
The US-China relationship also remains a critical factor in commodity markets. Trade tensions between these two economic giants can affect demand for various commodities, particularly industrial metals such as copper and aluminum.5 Given its status as the world's largest consumer of many raw materials, China's economic growth (or slowdown) has an outsized impact on commodity demand.
Energy transition
Beyond geopolitical factors, the global push towards renewable energy sources like solar and wind and electrification is reshaping demand patterns in the commodity space. Metals such as copper, aluminum, and nickel are seeing increased demand due to their use in electric vehicle batteries and renewable energy infrastructure. This trend will likely continue as countries strive to meet their climate commitments. However, the scale of the transition is massive, and the pace has been uneven. Regardless, extracted commodities, such as oil and gas, are expected to remain crucial energy sources in the near future.
When choosing commodities for investment, gold, silver, platinum, palladium, and copper are some of the most compelling options. Gold has a long-standing reputation as a safe-haven asset that retains value even during economic uncertainty (Chart 1).
Chart 1. Gold remained relatively stable through 2020 market volatility
Source: Bloomberg, abrdn Investments. Data from 1/2/2020–12/31/2020. Spot Gold = GOLDLNPM Index, S&P 500 = SPXT Index, Russell 2000 = RTY Index, MSCI World Index = MXWO Index.
Similarly, silver also has some safe haven benefits but also has more than 10,000 end uses, mostly industrial. It’s also a key component in solar energy (a typical residential solar panel contains up to 20 grams). Furthermore, palladium and platinum are critical in the abatement of automobile emissions. They’re both used to make catalytic converters, which help reduce pollutants in car exhaust.6
Copper, commonly known as the "red metal," is a crucial component in electrical grid infrastructure development, making it an attractive choice as economies expand and demand for construction materials increases. Copper is an element required for all electric functions. It is used extensively in the motors, wiring, and charging stations for electric vehicles (EVs), solar panels, wind turbines, and traditional power generation, including AI data centers, which are only continuing to grow in popularity. With demand for copper reported to nearly double by 2035, mining companies are having difficulty keeping up.
Climate change
Climate change impacts agricultural production, with extreme weather events like hurricanes, floods, and droughts disrupting crop yields, leading to supply disruptions and price volatility. This volatility can lead to price fluctuations in agricultural commodities.
Offering distinct advantages
Exchange-traded funds (ETFs) have emerged as powerful tools for commodity investors seeking exposure to raw materials.7 While traditional methods like direct ownership offer a more hands-on approach, ETFs provide a unique blend of accessibility, liquidity, and cost-effectiveness.
ETFs collect a basket of securities, such as stocks, bonds, or commodities, and most often track an underlying index. Because of the dramatic growth that the ETF market has experienced in recent years, investors now have a wider selection of commodity ETFs. This provides them the chance to gain exposure to numerous commodities and choose from options that employ a range of investment strategies to help meet various financial goals. Key considerations to consider include:
Accessibility
Unlike when investors directly own physical commodities like gold or oil, which involve storage, insurance, and logistical complexities, ETFs offer a user-friendly alternative. ETFs provide investors easier access to commodities, an asset class in which they might not otherwise be able to participate. ETF shares can be bought and sold like stocks on a stock exchange, eliminating the need for physical handling or specialized infrastructure. This ease of access makes it easier for everyday investors to participate in the commodity market.
Diversification1
Broad commodity ETFs track a basket of commodities, providing inherent diversification. This spreads your risk across different raw materials, mitigating the impact of price fluctuations in any single commodity. For example, an ETF tracking a broad energy index might include exposure to crude oil, natural gas, and heating oil, offering a more diversified return on the energy sector.
Cost-effectiveness
Investing in physical commodities on an individual basis involves storage and transportation costs, which can eat into returns, to say nothing of retail transaction costs. Additionally, trading futures contracts often require a significant upfront margin deposit and continual trading to extend the contracts before expiration.8 On the other hand, ETFs typically have lower expense ratios than actively managed commodity mutual funds. This translates to lower overall costs for investors, allowing them to capture a larger portion of the potential returns. In many circumstances, improved tax efficiency with more favorable tax treatments on capital, short-term, and long-term gains may be possible.9
Transparency and liquidity10
ETFs trade on daily exchanges, offering more frequent liquidity than mutual funds. They also provide investors with an investment vehicle with a growing market as the world shifts from mutual funds to ETFs that offer greater liquidity and that trade throughout the day.2 Additionally, most commodity ETFs publish daily holdings, providing transparency into the underlying assets that the ETF tracks.11 This allows investors to understand their investments and how the fund's performance is tied to specific commodities.
Portfolio management
Certain commodity ETFs are passively managed, meaning they track a specific index of commodities –this reduces investors’ costs by closely tracking underlying commodity prices and requiring less portfolio management activity.12 This frees investors from the burden of actively researching and selecting individual commodities, while still offering exposure to the commodity market. Alternatively, some actively managed commodity ETFs employ professional management teams who make strategic decisions about the fund's holdings based on market conditions. However, the exposure to individual commodities can vary greatly over time.
A recent history
The past two years have been eventful for commodity investors.
In 2022, post-pandemic demand, supply chain disruptions, and geopolitical tensions drove up energy prices. Brent crude topped $130 per barrel, natural gas in Europe reached record highs, and the conflict in Ukraine further squeezed energy supplies.13 Extreme weather events worsened agricultural concerns, leading to a surge in wheat prices. Additionally, industrial metals like copper gained momentum due to strong demand and potential supply constraints.
The second half of 2022 saw a shift. Fears of war-induced shortages eased, and concerns about a global slowdown as China remained in COVID lockdown pressured prices lower. Oil prices retreated, though they remained volatile.
The market saw calmer conditions in 2023, with a general downward trend in commodity prices due to a potential global slowdown and central bank efforts to combat inflation. However, geopolitical tensions continued to affect energy markets, while China's reopening boosted demand for industrial metals. Extreme weather events highlighted challenges in agricultural production posed by climate change.
Commodity investing has been marked by significant volatility and opportunity in 2024. Key drivers include high demand, fluctuating interest rates, and ongoing supply chain disruptions.14,15 Strong demand amid supply constraints have supported commodity prices, as investors slowly revisit gold and silver portfolio additions. Lower interest rates have also made commodities more attractive by reducing the opportunity cost of holding non-yielding assets.
Energy commodities, particularly oil, have seen strong gains due to geopolitical tensions and production cuts. Metals like gold and silver have benefited from central bank buying and increased industrial demand respectively. Additionally, supply chain issues have continued to impact commodity availability, further driving prices up.
A brighter tomorrow?
Today, some of those challenges appear to have been resolved. Amid commodities having risen for a second straight quarter in 2024 and potential tailwinds for the asset class in terms of China and US easing measures, we believe several factors suggest the environment through the windshield ahead of us may be more supportive than the backdrop in the rearview mirror.
Investors should consider a long-term allocation to commodities due to their low correlation to other market segments, which provides diversification benefits. ETFs may offer access to unique opportunities, making this approach particularly suitable today.
And given the continued risk of geopolitics and trade tensions creating market volatility, investors may be particularly interested in the low-correlation properties that commodity exposure may add to their portfolios.
Final thoughts
Investors have compelling reasons to consider a long-term, strategic allocation to commodities due to their low correlation to other market segments and diversification benefits. ETFs offer access to unique opportunities for commodity investors that can't be found in other asset classes. We believe a commodity allocation may be especially suitable today.
1 Diversification does not eliminate the risk of experiencing investment losses
2 Hedging refers to reducing the risk of an investment, or protecting an existing position, by using derivative investments to cover adverse market movements.
3 If the price of a fund moves significantly over a short period of time it is said to be 'volatile' or has 'high volatility'. If the price remains relatively stable it is said to have 'low volatility'. Volatility can be used as a measure of risk.
4 "Oil prices edge higher as Middle East uncertainty persists." MSN, October 2024. https://www.msn.com/en-us/money/markets/oil-prices-edge-higher-as-middle-east-uncertainty-persists/ar-AA1sne4l?ocid=BingNewsSerp.
5 "U.S. And China Vie For Copper As Demand And Prices Soar." Forbes, January 2024. https://www.forbes.com/sites/arielcohen/2024/01/23/the-us-china-competition-for-copper-commands-a-policy-reform/.
6 "Cooler catalytic converters: Cleaner air for all." Department of Chemistry and Chemical Biology, Harvard University, April 2020. https://www.chemistry.harvard.edu/news/cooler-catalytic-converters-cleaner-air-all.
7 Exposure refers to the amount of a portfolio invested in a particular area. If $5,000 of a $10,000 portfolio is invested overseas, it is said to have a 50% overseas exposure.
8 Futures refers to a type of derivative contract which involves agreeing to buy or sell assets at a set price on a fixed date in the future.
9 Tax efficiency is when an individual or business pays the least amount of taxes required by law. A financial decision is said to be tax-efficient if the tax outcome is lower than an alternative financial structure that achieves the same end.
10 Liquidity refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price.
11 Price transparency reflects the extent to which price and market information, such as bid-ask spread and depth, exist for a security.
12 Brokerage commissions may apply and would reduce returns.
13 "U.S. crude oil briefly tops $130 a barrel, a 13-year-high." CNBC, March 2022. https://www.nbcnews.com/business/energy/us-crude-oil-briefly-tops-130-barrel-13-year-high.
14 "Commodities in 2024: Big Moves, Greater Opportunities." Yahoo! Finance, May 2024. https://finance.yahoo.com/news/commodities-2024-big-moves-greater-182500948.html.
15 "Q1 2024 COMmodity Recap." Direxion, April 2024. https://www.direxion.com/commentary/q1-2024-commodity-recap.
Important information
BROAD COMMODITIES
An investor should consider the investment objectives, risks, charges and expenses of the Funds carefully before investing. To obtain a prospectus containing this and other important information, call 844-ETFs-BUY (844-383-7289) or visit www.abrdn.com/usa/etf. Read the prospectus carefully before investing.
Fund Risk: There are risks associated with investing including possible loss of principal. Commodities generally are volatile and are not suitable for all investors. There can be no assurance that the Fund’s investment objective will be met at any time. The commodities markets and the prices of various commodities may fluctuate widely based on a variety of factors. Because performance is linked to the performance of highly volatile commodities, investors should consider purchasing shares of the Fund only as part of an overall diversified portfolio and should be willing to assume the risks of potentially significant fluctuations in the value of the Fund.
The Fund employs a “passive management” – or indexing – investment approach designed to track the performance of the Index. The Fund will generally seek to hold similar interests to those included in the Index and will seek exposure to many of the commodities included in the Index under the same futures rolling schedule as the Index. The Fund will also hold short-term fixed-income securities, which may be used as collateral for the Fund’s commodities futures holdings or to generate interest income and capital appreciation on the cash balances arising from its use of futures contracts (thereby providing a “total return” investment in the underlying commodities).
Through holding of futures, options and options on futures contracts, the Fund may be exposed to (i) losses from margin deposits in the case of bankruptcy of the relevant broker, and (ii) a risk that the relevant position cannot be closed out when required at its fundamental value. In pursuing its investment strategy, particularly when rolling futures contracts, the Fund may engage in frequent trading of its portfolio of securities, resulting in a high portfolio turnover rate.
As a “non-diversified” fund, the Fund may hold a smaller number of portfolio securities than many other funds. To the extent the Fund invests in a relatively small number of issuers, a decline in the market value of a particular security held by the Fund may affect its value more than if it invested in a larger number of issuers. The value of shares may be more volatile than the values of shares of more diversified funds.
During situations where the cost of any futures contracts for delivery on dates further in the future is higher than those for delivery closer in time, the value of the Fund holding such contracts will decrease over time unless the spot price of that contract increases by the same rate as the rate of the variation in the price of the futures contract. The rate of variation could be quite significant and last for an indeterminate period of time, reducing the value of the Fund.
Changes in the laws of the United States and/or the Cayman Islands, under which the Fund and the Subsidiary are organized, respectively, could result in the inability of the Subsidiary to operate as intended and could negatively affect the Fund and its shareholders.
To the extent the Fund is exposed directly or indirectly to leverage (through investments in commodities futures contracts) the value of that Fund may be more volatile than if no leverage were present.
In order to qualify for the favorable U.S. federal income tax treatment accorded to a regulated investment company (“RIC”), the Fund must derive at least 90% of its gross income in each taxable year from certain categories of income (“qualifying income”) and must satisfy certain asset diversification requirements. Certain of the Fund’s investments will not generate income that is qualifying income. The Fund intends to hold such commodity-related investments indirectly, through the Subsidiary. The Fund believes that income from the Subsidiary will be qualifying income because it expects that the Subsidiary will make annual distributions of its earnings and profits. However, there can be no certainty in this regard, as the Fund has not sought or received an opinion of counsel confirming that the Subsidiary’s operations and resulting distributions would produce qualifying income for the Fund. If the Fund were to fail to meet the qualifying income test or asset diversification requirements and fail to qualify as a RIC, it would be taxed in the same manner as an ordinary corporation, and distributions to its shareholders would not be deductible by the Fund in computing its taxable income.
Investors buy and sell shares on a secondary market (i.e., not directly from Trusts). Only market makers or “authorized participants” may trade directly with the Trusts, typically in blocks of 25k to 100k shares.
Bloomberg®, Bloomberg Commodity Index Total ReturnSM, Bloomberg Commodity Index 3 Month Forward Total ReturnSM and Bloomberg Industrial Metals Subindex Total ReturnSM are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the indices (collectively, “Bloomberg”) and have been licensed for use for certain purposes by abrdn ETFs Advisors LLC. Bloomberg is not affiliated with abrdn ETFs Advisors LLC, and Bloomberg does not approve, endorse, review, or recommend abrdn Bloomberg All Commodity Strategy K-1 Free ETF, abrdn Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF and abrdn Bloomberg Industrial Metals K-1 Free ETF. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to Bloomberg Commodity Index Total ReturnSM, Bloomberg Commodity Index 3 Month Forward Total ReturnSM and Bloomberg Industrial Metals Subindex Total ReturnSM.
ALPS Distributors, Inc. is the distributor for the abrdn ETFs.
ALPS is not affiliated with abrdn.
PRECIOUS METALS
The statements and opinions expressed are those of the author and are as of the date of this report. All information is historical and not indicative of future results and subject to change. Reader should not assume that an investment in any securities and/or precious metals mentioned was or would be profitable in the future. This information is not a recommendation to buy or sell. Past performance does not guarantee future results.
Trading in commodities entails a substantial risk of loss and is not suitable for all investors.
Diversification does not eliminate the risk of experiencing investment losses.
Prospectuses for abrdn Physical Gold Shares ETF, abrdn Physical Palladium Shares ETF, abrdn Physical Platinum Shares ETF, abrdn Physical Precious Metals Basket Shares ETF and abrdn Physical Silver Shares ETF
Projections are offered as opinion and are not reflective of potential performance.
Projections are not guaranteed, and actual events or results may differ materially.
ALPS Distributors, Inc. is the marketing agent.
There are risks associated with investing including possible loss of principal.
ALPS is not affiliated with abrdn.
ETF002272 11/30/25
AA-171024-184561-1