How to invest in the commodities market through stocks
Trading on the commodity market might feel complicated, as the commodity market is not as easy to access as the stock market. The stock market has become a market where everybody trades. This commodities market, on the other hand, remains a more exclusive club where fewer traders actually invest. This is partly due to the stock market being promoted to the common man as a good place to grow their money. But it’s also partly due to the fact that stocks feels easier to appraise than commodities. It feels easier to predict how a single stock will move rather than how a commodity will move globally. It feels easier to grasp how a company will move, rather than how the entire market for a commodity like onions will move. Partly due to the fact that there are often more unknowns when it comes to commodities, such as weather.
An easy way to invest in the commodity market, without actually having to learn about it or invest directly, is to invest in commodity-based stocks. Commodity-based stocks are stocks and companies that primarily produce one or a limited amount of commodities. Easy-to-understand examples are forestry and mining companies. The profitability of these companies will be based upon the movements off the commodity on the commodity market, and will therefore give you indirect exposure to the commodity market.
You can also choose to invest in commodity-backed ETFs. This gives you a more direct exposure to the commodity market while still being available through your regular stockbroker.
Below you can learn more about investing in commodity-based stocks. What is unique for this type of stocks? What should you think about? And how should you design your portfolio to not get exposed to excessive risk?
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Why use stocks for commodity exposure
Stocks offer easier access, lower operational complexity, and often more convenient liquidity than direct commodity contracts. You can buy shares in producers and processors on a retail brokerage account the same way you buy any equity. Stocks can provide dividend income, long term capital appreciation and an equity cushion against some of the short term swings in commodity spot prices. They also allow you to benefit from company level improvements such as cost cutting, exploration success, or vertical integration that raise returns independently of commodity moves. That said commodity correlated stocks add other risks such as management execution, leverage on the balance sheet, and idiosyncratic events such as strikes or regulatory actions. Understanding that trade off is the first step to using equities intelligently to get commodity exposure.
Main routes to commodity exposure via stocks
There are three broad channels most investors use to get commodity exposure through equities. First, buy shares of producers and processors. These are companies that extract, grow, or refine commodities. Examples include mining companies, oil and gas producers, agricultural processors and timber companies. Their stock prices usually move with the underlying commodity over time, but the correlation is imperfect because company costs, hedging and capital decisions alter outcomes. Second, buy shares of exchange traded funds that track commodity prices or indices. These ETFs trade like stocks and provide diversified exposure across producers or across futures contracts. Some ETFs hold physical metal bullion while others roll futures contracts and so carry roll costs. Third, buy shares in commodity related services or equipment companies. These are firms that provide drilling rigs, fertilizer, shipping, or processing equipment. Their revenue often rises with commodity activity and capital spending but can decouple from spot prices in different phases of the cycle.
Each route has strengths. Producer equities can amplify commodity rallies because profits expand when prices rise. ETFs simplify exposure and offer diversification. Service companies sometimes provide leveraged exposure to commodity cycles without direct commodity price correlation. Your choice should match capital, risk tolerance and the operational simplicity you want.
Choosing between producers, ETFs and service names
Producers can reward patient investors who evaluate reserves, production costs and balance sheet health. When considering producers focus on reserve life, production profile, unit cash cost, debt levels, and management track record. Cheaper per unit production cost allows the company to remain profitable at lower commodity prices. A low debt load reduces bankruptcy risk when prices fall. Look for companies that hedge prudently rather than rely on aggressive leverage to magnify returns. Also consider jurisdictional risk. Mining or oil projects in politically unstable countries add significant risk unrelated to commodity direction.
ETFs remove single company risk but can hide important mechanics. Funds that hold futures suffer from contango when forward prices are higher than spot leading to roll losses for long holders. Some ETFs hold physical metal and avoid the futures roll question but pay storage fees. Equity based commodity ETFs that own producer stocks offer simpler dividend yields and remove futures roll but reintroduce corporate risk. Read fund documents to see whether the fund holds futures physicals or equities, and check expense ratios and tax treatments. Service companies often trade at different multiples and may be more cyclical. They can outperform in an up cycle because increased activity boosts orders, but they also slump when capex dries up.
What to look for in commodity ETFs
Not all commodity ETFs are equal. Confirm the underlying exposure. Does the fund hold futures contracts, physical commodity, or stocks of commodity companies? If futures, find out the roll schedule and the historical roll yield during various market regimes. If physical, check storage arrangements and insurance. If the ETF holds equities, confirm the index methodology and weighting rules because commodity equity ETFs can be concentrated in a few large producers. Expense ratio and bid ask spread matter. Low fees are preferable but not at the cost of poor tracking. Check tax treatment especially for ETFs that use swaps or complex structures as they can generate unusual tax forms or distributions. Understand re balancing frequency and how index re weights affect turnover and realized capital gains.
Portfolio construction and diversification
Commodities are cyclical and their development is often connected to macro factors. Having too much exposure to one certain commodity industry will make you face extensive cyclical pressure. In other words, your entire portfolio might be dependent on the cyclical nature of a certain type of commodity. This increases the risk and should be avoided unless you’re willing to accept the loss of value in your portfolio during the down part of the cycle.
It is usually best to cycle in and out of commodities as there are cycles to earn. Sell when a cycle is near its top, and try to get back into this commodity when you believe the cycle to be near the bottom. Do not try to exactly predict the tops and lows because this is impossible. Being able to correctly predict the trends is enough to be able to make a lot of money over time. Even if you leave a little money on the table each time by buying a little too late and selling a little too early. This is still preferable to buying too early and selling too late.
If you want to have a less volatile portfolio, you might also want to consider mixing in other non-commodity based stocks into your portfolio. .
Risk controls and position sizing
Size positions so that a commodity shock cannot force ruin. Use the same position sizing math you apply to any equity trade focusing on defined dollar risk per position. Producers can gap on news and their correlation to underlying spot can break down quickly. Maintain stop or exit rules appropriate for longer term positions because equity volatility differs from futures tick volatility. If you own leveraged or highly cyclical names keep exposure modest and consider hedging with options or inverse ETFs where appropriate and you understand the costs. Hedging reduces upside as well as downside so use it sparingly and with clear cost benefit analysis.
Timing, cyclical awareness and practical timing tools
Commodity investing through stocks benefits from cycle awareness. Inventory reports, seasonal demand swings, weather, and macro growth data influence commodity supply and demand. Producers tend to lead commodity rallies because profit expectations rise faster than spot for some firms and investment flows amplify the moves. Use fundamental indicators such as inventories and production data in combination with price momentum and valuation metrics to decide when to enter and exit. Avoid trying to time short term noise if your investment horizon is multi year, but do respect cycle signals when you intend to hold only through a cyclical upswing.
Costs and execution considerations
Pay attention to total cost not just the quoted price. Bid ask spreads for thinly traded commodity producers can be large. Some commodity equity ETFs have narrow spreads but higher expense ratios. Trading large positions in small cap producers moves the market and can create slippage that eats returns. Use limit orders where appropriate and mind the market open and close for volatile names.
This will not be an issue if you invest mainly in larger companies.
Common mistakes and how to avoid them
A frequent error is assuming a one to one correlation between commodity price and the stock. Company specific costs, hedging programs, and corporate actions break that link often.
It is also common for a company’s stocks to fully run the commodity trends. Savvy investors is well aware of the cyclical nature of most commodities and is able to pre-run the commodity price.
Another mistake is over concentration in a single large bet based on a short term price forecast. Also avoid ignoring balance sheet risk and investing solely on anecdotal narratives or headlines.
Finally, do not forget the tax and structural complexity of some commodity related securities. Read the fund prospectus or company filings so you know what you own and how it behaves in different market regimes.
This article was last updated on: December 12, 2025