According to Morningstar, investing in commodities has seen the best results when the investor is limited and diversified. Specifically among energy, agricultural, and industrial and precious metals.

While you could physically buy gold bars or barrels of oil and keep them in your garage, this is not a practical solution. You have to worry about insurance and storage, and some soft commodities like corn aren’t going to hold up too well over the years. For many decades, these barriers prevented the average trader from investing in commodities, but now exchange-traded funds have now made it possible for individuals to gain direct exposure.

Morningstar has an interesting ETF scanner that will help you find ETFs for various classes of commodities. For example, if you were looking for gold exposure, then, using the screener, you would find the ETF, SPDR Gold Shares GLD, which buys gold bars for every share issued, and then store them in vaults in London.

ETF Screener

Here is a list of some of the more popular commodity ETFs.

• PowerShares DB Oil (DBO)
• U.S. Oil (USO)
• iShares Silver Trust (SLV)
• iPath Dow Jones AIG Commodity Index (DJP)
• PowerShares DB Agriculture Fund (DBA)
• PowerShares DB Energy Fund (DBE)

Essentially using an ETF screener such as the one at Morningstar will not only allow exposure to commodities, but also the ability to properly invest in it without having to actually store a tangible item.

The official definition of an exchange-traded fund is (according to investopedia)

A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.

Why invest in an ETF?

Like stated at the very beginning of this article, an ETF allows you to increase your diversity, but still trade it like a stock. For example, if you like the financial sector, then why pick just one stock to invest? You could find an ETF that traces the gains and losses of a collection of financial stocks. That way you are not required to pick the winner out of the group.

It seems like there are ETFs that cover almost every sector and index now. You can see a full list of ETF’s over at Yahoo’s database and 40 Great Inverse / Short ETFs For Bearish Investors. There is also a form called a leveraged ETF, which makes 2 to 3x returns of the index its tracking.

You might also be curious in check out how trade triangles can help you trade in the ETF markets.