Raw materials make up a crucial part of the supply chain for organizations across all sectors of the global economy.
Commodities are well-positioned to perform well in the current circumstances, and you might be looking for ways to get exposure to their performance.
Let’s review our top picks for the best commodity ETFs in Canada.
Importance of Commodity ETFs in Portfolio Diversification
When it comes to investment, one of the cardinal principles is diversification – not putting all your eggs in one basket.
Portfolio diversification acts as a risk management strategy, aiming to spread investments across various asset classes to reduce potential losses. Here are some of the portfolio diversification features of commodity ETFs:
- Natural Hedge against Market Volatility: Commodity ETFs, by their very nature, can act as a hedge against market fluctuations, especially during periods when traditional equities may not be performing optimally. They tend to have a low correlation to equities and bonds, which means their price movements often run counter to the traditional stock market, thus offering a level of protection in bear markets.
- Access to Global Markets: Many commodities have a global market, and their prices are influenced by global factors such as geopolitical events, global demand and supply shifts, and currency movements.
- Inflation Protection: Historically, commodities have had a positive correlation with inflation. When the cost of goods and services rises, commodities, being the raw materials, often see a concurrent price rise.
Commodity ETFs and Inflation
Inflation, the general rise in prices over time, can be a bane for traditional investments. However, commodities have often been the silver lining during inflationary periods.
- Direct Relationship with Goods and Services: Commodities are the foundational blocks for a majority of goods and services. As inflation drives up the cost of finished products, the raw materials (commodities) used to produce these goods tend to increase in value as well.
- Historical Resilience: Assets like gold have traditionally been viewed as “safe-haven” assets during times of economic uncertainty and inflation. Gold, for instance, retains its value and often even sees a price surge during inflationary periods, making it a favourite among investors seeking to hedge against inflation.
- Broad Exposure: Commodity ETFs are not limited to just precious metals like gold and silver. They offer exposure to a wide range of commodities including oil, agricultural products, and more.
Best Commodity ETFs in Canada
- Horizons Silver Trust ETF (HUZ.TO)
- BlackRock iShares S&P/TSX Capped Energy Index ETF (XEG.TO)
- Horizons Crude Oil ETF (HUC.TO)
- Horizons Natural Gas ETF (HUN.TO)
- Horizons Silver 2X Daily Bull ETF (HZU.TO)
- BMO S&P/TSX Equal Weight Oil & Gas ETF (ZEO.TO)
- Horizons S&P/TSX Capped Energy Index ETF (HXE.TO)
- Horizons Gold Bullion 2X Daily Bear ETF (HBD.TO)
- Horizons BetaPro Crude Oil Leveraged Daily Bull ETF (HOU.TO)
- BlackRock iShares S&P/TSX Global Gold Index ETF (XGD.TO)
Horizons ETFs is a major ETF provider in Canada, and the fund manager offers several commodity ETFs that you can consider. Horizons Silver Trust ETF (HUZ) is a fund established by Horizons ETFs in June 2009.
The ETF offers you exposure to silver by emulating the performance of the Solactive Silver Front Month MD Rolling Futures Index ER.
The fund is denominated in Canadian dollars, and any US dollar gains or losses due to the fund’s investments are hedged back to the Canadian dollar to the best of the ETF’s ability.
The energy sector is another crucial industry that deals with a precious commodity you could consider gaining exposure to. BlackRock iShares S&P/TSX Capped Energy Index ETF (XEG) is one of the best assets to consider if you want to invest in publicly-traded Canadian companies in the energy industry.
iShares XEG ETF is one of Canada’s most substantial commodity ETFs, with an AUM of $1.50 billion at writing.
iShares XEG ETF is also a method to gain low-cost exposure to the energy sector. The ETF allocates 100% of its resources to 14 Canadian energy companies, effectively expressing a sector view.
The fund does not diversify its asset allocation into fixed-income assets, futures contracts, or equity securities trading in other sectors of the economy, making it a high-risk investment.
Horizons Crude Oil ETF (HUC) is another fund offered by Horizons ETFs that deals in commodities. The fund was established on June 24, 2009, and it provides you with exposure to the energy industry.
Unlike iShares XEG ETF, the fund does not allocate its resources to publicly listed energy companies in Canada. Instead, it emulates the performance of the Solactive Light Sweet Crude Oil Winter MD Rolling Futures Index ER.
It means that the fund focuses entirely on investing in oil futures contracts from Canadian financial institutions. But HUC is a costly fund with a high MER
Horizons Natural Gas ETF (HUN) is a fund offered by Horizons ETFs that deals with commodities in the energy sector. The fund was also established on June 24, 2009, and it offers you exposure to the performance of the energy industry by focusing on natural gas.
Horizons HUN ETF tracks the performance of the Solactive Natural Gas Winter MD Rolling Futures Index ER. As such, the fund allocates its entire assets to rolling futures contracts issued by Canadian financial institutions.
The fund does not diversify into other sectors of the economy and does not invest in publicly listed Canadian energy companies.
Horizons Silver 2X Daily Bull ETF (HZU) is another fund offered by Horizons ETF that offers you exposure to the performance of silver.
Horizons HZU was established on June 29, 2009, and it seeks daily investment results, before fees, expenses, distributions, brokerage commissions, and other transaction expenses, to correspond to twice the daily performance of silver futures contracts issued by Canadian financial institutions.
Since the ETF uses leverage, it is a far riskier asset than most other funds. The fund seeks a return for twice the returns of the referenced index for a single day, making any volatility in the underlying index more pronounced. It is quite an expensive ETF to own with a very high MER.
BMO S&P/TSX Equal Weight Oil & Gas ETF (ZEO) is a fund issued by BMO Global Asset Management.
BMO ZEO ETF was established on October 20, 2009, and it seeks to provide you with exposure to Canadian energy industry companies by emulating the performance of the Solactive Equal Weight Canada Oil & Gas Index to the extent possible and net of expenses.
BMO ZEO ETF allocates 100% of its funds to Canadian energy companies, but it diversifies its asset allocation to several segments of the oil and gas sector in Canada. The fund could be an ideal way to get diversified exposure to the Canadian energy industry.
Since the fund offers no exposure to other asset classes or different sectors of the economy, it entails high capital risk.
Horizons S&P/TSX Capped Energy Index ETF (HXE) is a fund issued by Horizons ETF that offers you exposure to the Canadian energy sector.
The fund was established on September 16, 2013, and it is one of the best commodity ETFs in Canada for several reasons. Its significantly low-cost method is a major factor here. The fund is one of the least expensive fund to own on this list.
Horizons HXE ETF seeks to emulate the performance of the S&P/TSX Capped Energy Index (Total Return) to the extent possible and net of expenses. It means that the relative weighting of each single constituent security is capped.
The fund does not directly hold any of the constituent securities, unlike with other ETFs, and it provides total returns without direct taxable distributions, allowing the fund to lower its costs to unitholders.
Horizons Gold Bullion 2X Daily Bear ETF (HBD) is a fund issued by Horizons ETF that offers you exposure to the performance of gold.
Like Horizons HZU ETF, the fund seeks daily investment results before fees, expenses, distributions, brokerage commissions, and other transaction costs that correspond to twice the daily performance of the gold futures index.
Unlike Horizons HZU ETF, Horizons HBD ETF seeks investment results that correspond to twice the performance of gold futures contracts issued by financial institutions in the opposite direction of its performance.
It is not an ideal ETF to own during inflationary markets because it moves in the opposite direction of gold’s performance. The fund is also costly, with a very high MER.
Horizons BetaPro Crude Oil Leveraged Daily Bull ETF (HOU) is another energy ETF issued by Horizons ETFs that offers you exposure to the performance of crude oil. The fund does not invest in publicly listed Canadian energy companies.
Instead, the fund allocates its resources to oil futures contracts. The fund seeks to emulate the daily investment results with up to twice the daily performance of the Horizons Crude Oil Rolling Futures Index.
Horizons HOU ETF uses leverage, making it a riskier investment than many other ETFs. The cost of this strategy results in a high management fee.
BlackRock iShares S&P/TSX Global Gold Index ETF (XGD) is one of the most massive ETFs on my list of the best commodity ETFs in Canada. The fund boasts an AUM of $1.20 billion, making it the second-largest fund on this list behind iShares XEG ETF.
The fund seeks to provide you with exposure to the performance of publicly listed Canadian gold-producing companies with geographically diversified operations.
iShares XGD ETF is an ETF well-suited as a hedge against inflationary markets due to its exposure to gold. The fund is a high-risk investment because it does not diversify into other industries or fixed-income assets. A weak performance in gold prices could lead to significant capital risk for investors.
For many investors who have been watching the headlines lately, they have valid fears of inflation causing them to reassess their portfolios. After all, rising living costs negatively impact consumer purchasing power, and that, in turn, affects several industries.
However, commodities are an asset class that proves resilient amid rising inflation.
From metals to agricultural products and energy sources, commodities across various industries have historically seen their values rise during inflationary conditions.
I have mentioned ten different ETFs in my list of the best commodity ETFs in Canada. Only Horizons HBD ETF is a fund that goes in the opposite direction of the performance of commodities.
Technically, any of the remaining commodity ETFs I have listed could be considered excellent hedges against inflation. However, you can consider iShares XGD the best commodity ETF for inflation due to rising gold prices during volatile environments in stock markets.
Gold has long been a safe-haven asset for investors looking to protect themselves from the impact of a downturn in equity securities, and iShares XDG is the ideal asset for investors seeking low-risk and convenient exposure to the rare yellow metal.
How To Buy The Best Commodity ETF In Canada
The cheapest way to buy stocks is from discount brokers. My top choices in Canada are:
- 105 commission-free ETFs to buy and sell
- Excellent customer service
- Top-notch market research tools
- Easy-to-use and stable platform
- Stock and ETF buys and sells have $0 trading fees
- Desktop and mobile trading
- Reputable fintech company
- Fractional shares available
To learn more, check out my full breakdown of the best trading platforms in Canada here.
Commodity ETFs offer you an easy way to invest in raw materials without having to purchase the physical assets themselves. Many investors consider investing in commodities a risky move.
It does entail a significant degree of capital risk, but the historically negative correlation of commodities to equity securities could be an interesting way to improve portfolio diversification.
Various indices track different commodities, and ETFs tracking those indices could provide you with significant wealth growth, depending on the operating environment.
Whether you want to invest in commodities for long-term returns or as a hedge against inflation, choosing the right ETF for this purpose can help you achieve your goals.
And if you are interested in hedging your bets against inflation through exposure to a more precious commodity like gold, you could consider checking out my list of the best gold ETFs in Canada.