These building blocks include agricultural items like corn, soy, wheat, sugar, and coffee; metals used in industrial activities like copper, aluminum, and nickel; precious metals used in electronics and as a store of value like silver and gold; livestock such as hogs and cattle; and of course, exposure to the primary components of energy including at least one grade of crude oil, as well as gasoline, diesel, and natural gas.

Ideally, the index should react to surprise inflation and provide diversification benefits to an investor's portfolio's stock and bond portions.¹

How do commodity indices gain exposure to electricity?

While no one would suggest a commodity portfolio that excludes a widely used product like crude oil should qualify as comprehensive, given that gasoline accounts for $150–$200 a month of consumer purchases, some commodity indices completely exclude any exposure to electricity, where consumers spend $130–$200 monthly.^2,3

How do commodity indices gain exposure to electricity?

This is an increasingly relevant question as the global quest to electrify a higher percentage of the economy's energy use may leave many portfolios under-exposed to the price of electricity itself.

The capital E that powers our everyday lives

Electricity is responsible for lighting, cooling, and heating in some parts of the US, as well as many parts of our public transportation system, home package deliveries, communication systems, data centers, and the internet.

Electricity demand is growing. The US added 20.2 gigawatts of generation in the first half of 2024, the most for that period since 2003, after solid demand increases from data centers and artificial intelligence.⁴

The current US grid consists of 160,000 miles of high-voltage lines and millions of miles of low-voltage lines operated by 500 companies connecting 7,300 power plants to 145 million customers. The US generated more than 4.16 trillion kilowatt-hours of power in 2023, and 21% of it came from renewables, 19% from nuclear, 16% from coal, and 43% from natural gas.⁵

Elon Musk best summed up the situation by saying that roughly one-third of our energy comes from electricity, so the high-level goal of electrification and renewable energy is to triple electricity demand.⁶ Europe, the US, and China, with a combined gross domestic product of $52 trillion, have made meaningful policy progress toward that goal, and investors have taken notice.^7,8

How can a commodity portfolio help investors participate in progress toward tripling electricity demand?

One way is to own metals that will have increased demand as they are used in electric vehicles, wind turbines, solar panels, nuclear power plants, grid-scale battery storage, and the expansion of grid transmission lines.

These metals are primarily copper, nickel, aluminum, zinc, and lead, constituting the Bloomberg Industrial Metals Index.⁹ A few other less-liquid metals could be troublesome to own in large funds and, therefore, do not meet the liquidity requirements for index inclusion.

Another way is to own the fuels that are used to generate electricity.

Uranium

Uranium is used to power nuclear power plants, which currently supply 19% of electricity to the US grid and will undoubtedly grow into the future. The newest version is called small modular nuclear, and in some cases, it can run on spent nuclear rods from traditional nuclear plants. 90% of the US uranium supply is enriched outside the US and imported, and 1% of uranium is mined inside the US.¹⁰

Coal

Coal generates 16% of electricity for the US grid, but its use has quickly declined since the US shale revolution added domestic natural gas supply in 2014. Coal is challenging to own as US coal futures are not as liquid as other commodity futures, and the EIA has stopped reporting coal futures trading.¹¹

Natural gas

Natural gas is one of the most liquid commodities, generating 43% of electricity for the US grid. Additionally, due to natural gas electricity generation facilities' quick response time, they are a perfect partner for intermittent wind and solar generation. Nuclear power becomes inefficient if it is ramped up/down daily or weekly, similar to coal, making it a poor partner for wind and solar.¹²

According to EIA data, 90% of natural gas plants can increase/decrease electricity generation within an hour, making them highly responsive and a perfect partner for wind and solar generators with highly intermittent generation.¹³

How does natural gas contribute to US electricity generation?

It would seem natural gas would be a vital component of any broad commodity portfolio based on its role in providing almost half of the electricity generation in the US and the strain on electricity supply growth in the US.

The downside of natural gas exposure is that prices can be very volatile. There are two primary cycles – or seasons – for natural gas in the US:

This variable nature of natural gas pricing causes some exchange-traded funds (ETFs) and mutual funds to exclude or reduce natural gas exposure in their broad commodity strategies to reduce volatility.¹⁴

Final thoughts

While understandable for reducing volatility, reducing natural gas exposure means significantly reducing or eliminating exposure to electricity prices, given the lack of exposure to coal and uranium in these benchmarks. Natural gas produces 43% of US electricity, uranium 19%, and coal 16%.¹⁵

We believe simply identifying economic trends like electrification is not enough; investors must also choose the proper vehicles to capitalize on those trends.

Some broad commodity ETFs do not include natural gas, which produces 43% of the electricity for the US grid. In that case, we believe one may consider exploring an option that follows the Bloomberg Commodity Index, which gives natural gas an 8.0% weight, and the Bloomberg Commodity Index 3 Month Forward, which gives natural gas a 10.1% weight.^16,17,18,19

¹ Diversification does not eliminate the risk of experiencing investment losses.
² "How Much Do People Spend On Gas Each Month?" J.D. Power, January 2023. https://www.jdpower.com/cars/shopping-guides/how-much-do-people-spend-on-gas-each-month.
³ "Electricity Bill Report: August 2024." Electricity Bills By State. Save On Energy, August 2024. https://www.saveonenergy.com/resources/electricity-bills-by-state/.
⁴ "US Adds Most Power Generation in 21 Years as AI Demand Surges." Bloomberg, August 2024. https://www.bloomberg.com/news/articles/2024-08-19/the-us-just-added-the-most-new-power-generation-in-21-years-as-ai-demand-surges.
⁵ "U.S. Electricity Grid & Markets." Green Power Markets. U.S. Environmental Protection Agency, March 2024. https://www.epa.gov/green-power-markets/us-electricity-grid-markets.
⁶ "A tripling of electrical output’: Tesla’s Musk urges power sector to anticipate higher demand." Utility Dive, July 2023. https://www.utilitydive.com/news/elon-musk-power-demand-growth-pge/688979/.
⁷ Gross Domestic Product is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.
⁸ Bloomberg, GDP for US, China, Europe, 2023.
⁹ Bloomberg Industrial Metals Sub-Index is composed of futures contracts on copper, aluminum, nickel, zinc, and lead.
¹⁰ "The United States imports most of the uranium it uses as fuel." Nuclear explained. U.S. Energy Information Administration, June 2023. https://www.eia.gov/energyexplained/nuclear/where-our-uranium-comes-from.php.
¹¹ US Energy Information Administration collects, analyzes, and disseminates independent and impartial energy information to promote sound policymaking, efficient markets, and public understanding of energy and its interaction with the economy and the environment.
¹² "Nuclear Power Reactors." Nuclear Fuel Cycle. World Nuclear Association, April 2024. https://world-nuclear.org/information-library/nuclear-fuel-cycle/nuclear-power-reactors/nuclear-power-reactors.
¹³ "About 25% of U.S. power plants can start up within an hour." Today in Energy. U.S. Energy Information Association, November 2020. https://www.eia.gov/todayinenergy/detail.php?id=45956.
¹⁴ An Exchange-traded fund (ETF) is an investment vehicle that comprises a group of stocks or other asset classes like bonds and commodities and can be traded on an exchange just like a common stock.
¹⁵ "What is U.S. electricity generation by energy source?" Frequently Asked Questions (FAQs). U.S. Energy Information Association, February 2024. https://www.eia.gov/tools/faqs/faq.php?id=427&t=3.
¹⁶ The Bloomberg Commodity Index (BCOM) is a broadly diversified commodity price index distributed by Bloomberg Index Services Limited.
¹⁷ Bloomberg Commodity Index natural gas weight, as of August 20, 2024.
¹⁸ The Bloomberg Commodity Index 3 Month Forward consists of 24 commodities which are weighted 2/3 by trading volume and 1/3 world production with an additional criterion of global economic significance. Weight caps are also applied to limit concentration in a particular sector (33%). The futures contracts are 3 months ahead of the standard contract calendar.
¹⁹ Bloomberg Commodity 3 Month Forward Index natural gas weight, as of August 20, 2024.

Important information

An investor should consider the investment objectives, risks, charges and expenses of the Funds carefully before investing. To obtain a prospectus containing this and other important information, call 844-ETFs-BUY (844-383-7289) or visit www.abrdn.com/usa/etf. Read the prospectus carefully before investing.

Fund Risk: There are risks associated with investing including possible loss of principal. Commodities generally are volatile and are not suitable for all investors. There can be no assurance that the Fund’s investment objective will be met at any time. The commodities markets and the prices of various commodities may fluctuate widely based on a variety of factors. Because performance is linked to the performance of highly volatile commodities, investors should consider purchasing shares of the Fund only as part of an overall diversified portfolio and should be willing to assume the risks of potentially significant fluctuations in the value of the Fund.

The Fund employs a “passive management” – or indexing – investment approach designed to track the performance of the Index. The Fund will generally seek to hold similar interests to those included in the Index and will seek exposure to many of the commodities included in the Index under the same futures rolling schedule as the Index. The Fund will also hold short-term fixed-income securities, which may be used as collateral for the Fund’s commodities futures holdings or to generate interest income and capital appreciation on the cash balances arising from its use of futures contracts (thereby providing a “total return” investment in the underlying commodities).

Through holding of futures, options and options on futures contracts, the Fund may be exposed to (i) losses from margin deposits in the case of bankruptcy of the relevant broker, and (ii) a risk that the relevant position cannot be closed out when required at its fundamental value. In pursuing its investment strategy, particularly when rolling futures contracts, the Fund may engage in frequent trading of its portfolio of securities, resulting in a high portfolio turnover rate.

As a “non-diversified” fund, the Fund may hold a smaller number of portfolio securities than many other funds. To the extent the Fund invests in a relatively small number of issuers, a decline in the market value of a particular security held by the Fund may affect its value more than if it invested in a larger number of issuers. The value of shares may be more volatile than the values of shares of more diversified funds.

During situations where the cost of any futures contracts for delivery on dates further in the future is higher than those for delivery closer in time, the value of the Fund holding such contracts will decrease over time unless the spot price of that contract increases by the same rate as the rate of the variation in the price of the futures contract. The rate of variation could be quite significant and last for an indeterminate period of time, reducing the value of the Fund.

Changes in the laws of the United States and/or the Cayman Islands, under which the Fund and the Subsidiary are organized, respectively, could result in the inability of the Subsidiary to operate as intended and could negatively affect the Fund and its shareholders.

To the extent the Fund is exposed directly or indirectly to leverage (through investments in commodities futures contracts) the value of that Fund may be more volatile than if no leverage were present.

In order to qualify for the favorable U.S. federal income tax treatment accorded to a regulated investment company (“RIC”), the Fund must derive at least 90% of its gross income in each taxable year from certain categories of income (“qualifying income”) and must satisfy certain asset diversification requirements. Certain of the Fund’s investments will not generate income that is qualifying income. The Fund intends to hold such commodity-related investments indirectly, through the Subsidiary. The Fund believes that income from the Subsidiary will be qualifying income because it expects that the Subsidiary will make annual distributions of its earnings and profits. However, there can be no certainty in this regard, as the Fund has not sought or received an opinion of counsel confirming that the Subsidiary’s operations and resulting distributions would produce qualifying income for the Fund. If the Fund were to fail to meet the qualifying income test or asset diversification requirements and fail to qualify as a RIC, it would be taxed in the same manner as an ordinary corporation, and distributions to its shareholders would not be deductible by the Fund in computing its taxable income.

Investors buy and sell shares on a secondary market (i.e., not directly from Trusts). Only market makers or “authorized participants” may trade directly with the Trusts, typically in blocks of 25k to 100k shares.

Bloomberg®, Bloomberg Commodity Index Total Return^SM, Bloomberg Commodity Index 3 Month Forward Total Return^SM and Bloomberg Industrial Metals Subindex Total Return^SM are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the indices (collectively, “Bloomberg”) and have been licensed for use for certain purposes by abrdn ETFs Advisors LLC. Bloomberg is not affiliated with abrdn ETFs Advisors LLC, and Bloomberg does not approve, endorse, review, or recommend abrdn Bloomberg All Commodity Strategy K-1 Free ETF, abrdn Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF and abrdn Bloomberg Industrial Metals K-1 Free ETF. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to Bloomberg Commodity Index Total Return^SM, Bloomberg Commodity Index 3 Month Forward Total Return^SM and Bloomberg Industrial Metals Subindex Total Return^SM.

ALPS Distributors, Inc. is the distributor for the abrdn ETFs.

ALPS is not affiliated with abrdn.

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