Commodities offer a diversification benefit in a long-term investment portfolio. Here we look at how to invest in commodities broadly with one single ETF.
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Commodities – metals, energy, livestock, and agriculture – offer what’s called an uncorrelation to the stock market, meaning the movement of each does not follow the other. Further, commodities sometimes move in the opposite direction (negative correlation) of stocks, providing a diversification benefit in one’s investment portfolio, particularly during periods of market turmoil. This property makes Commodities more attractive to retirees and those with a low risk tolerance aiming to reduce portfolio volatility and risk. This is the whole idea behind holding commodities in the All Weather Portfolio.
The most popular singular commodity most people know of is gold. Here we’re interested in diversifying broadly within commodities, and there happens to be an ETF that’s perfect for that. Historically, investing in Commodities required experience, time, and effort in using futures contracts. Nowadays, we can simply buy shares of an ETF (Exchange Traded Fund) just like shares of a stock.
The most popular ETF to invest in Commodities is the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF. Its ticker symbol is PDBC. As the name suggests, this fund has the convenient bonus of not producing a K-1 form at tax time (K-1’s are a headache), unlike most commodity funds. PDBC has over $2B in assets and an expense ratio of 0.59%. This fund gets you exposure to 14 commodity markets including oil, gasoline, corn, gold, sugar, natural gas, soybeans, and zinc.
PDBC is available on M1 Finance. The online broker has zero account fees and zero trade commissions, and offers fractional shares, dynamic rebalancing, cheap margin, and a modern, user-friendly web interface and mobile app. I wrote a comprehensive review of M1 Finance here.
Disclaimer: While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.