An exchange-traded fund (ETF) that is designed to provide investors with exposure to a single commodity or a basket of commodities. Commodity ETFs seek to track the price of commodities (physical assets) such agricultural goods (cotton and wheat), natural resources (oil and gas), and precious metals (gold and silver).
This ETF provides investors with exposure to an underlying commodity (commodities)- i.e., commodity price movements, index, etc, either directly by holding the physical commodity, or indirectly by tracking the benchmark by means of certain instruments such as derivatives (futures or options contracts).
Certain types of commodity ETFs are equity-based, that is, with exposure to, or investment in, companies that operate in commodity sectors such as natural resources, mining, agriculture, etc.
Commodity funds capitalize on commodity prices, which are generally not highly correlated to prices of other investment vehicle such as stocks and bonds. Commodities also tend to adjust for the effect of inflation. That is why investing in commodities, directly or indirectly, can help investors achieve better diversified portfolios, and to encounter the dynamics of price changes in an economy.
For more, see: types of commodity exchange-traded funds.
