The best time to invest in commodities funds is when prices are low and inflation is expected to significantly increase. Arguably, that time is now.

Wise investors know that there is no reliable or consistent timing signal that says when to buy a particular investment type or asset class. But there are reasonable cues that may be pointing toward a return of commodities funds in the near future.

Commodities funds are trending toward a fourth consecutive year of negative returns, which presents a potentially oversold condition. Also, healthier employment and consumer sentiment numbers are increasingly placing inflationary pressures on the U.S. economy.

With that said, it is important to keep in mind that commodities funds, like commodity futures contracts, do not hold physical assets; therefore price movement is driven by the expectations and speculation of investors. In different words, commodities funds as investments are not for everyone. However, held in relatively small amounts, such as 5% to 10% allocation in a portfolio, can be a smart diversification tool because of their low correlation with equity prices and for inflation protection.

Here are 3 of the best commodities funds to buy now.

Best Commodities Funds — Powershares DB Commodity Tracking Index (DBC)

PowerShares DB Commodity Index (DBC) tracks an index composed of futures contracts for 14 commodities from four sectors: energy, agriculture, industrial metals and precious metals.

Including all shares classes and fund security types, my research uncovered 170 broad basket commodities funds. But less than one-third of those funds have existed more than four years. DBC became available to investors back in February of 2006, making it nearly nine years old and therefore providing greater performance history perspective.

The most recent inflationary environment was the final three months of 2007 and the first half of 2008. Keeping mind that commodities funds will typically jump up in price as investor expectations for inflation increases. (Note that this is different from actual headline inflation.) Therefore 2007 is a good year to analyze for commodities funds performance.

In 2007, PowerShares DB Commodity Index had a price gain of 34.8%, compared to 28.1% for the average commodities broad basket fund, and 5.5% for the S&P 500 Index. And in 2008, when inflation halted and turned deflationary, DBC fell 38.1%, compared to 41.9% for average commodities funds and 37.0% for the S&P 500.

Futures do not track spot prices perfectly. As a result DBC will not always closely track the spot performance of its underlying commodities. With that said, DBC can be an outstanding choice for a long-term investor wanting to diversify their portfolio.

The expense ratio for DBC is 0.85%

Best Commodities Funds — PIMCO Commodity Real Return Strategy (PCRDX)

Like many funds in the commodities broad basket category, Pimco Commodity Real Return Strategy (PCRDX) invests in a basket of derivatives to replicate a diversified commodity index.

PCRDX is a mutual fund that tracks the Bloomberg Commodity Index, which is generally split evenly among energy, agriculture and metals. Although the fund does not consistently outperform the average commodities fund, PCRDX does a good job of staying ahead of its index. For example, the three- and five-year returns beat the index, as does the return since inception, which was back in 2002.

One aspect to watch, although not a significant concern, is the exit of Bill Gross, who had been a manager of this fund. Perhaps cancelling out this concern is the team, including co-manager Mihir Worah, that Pimco still has in place for this fund.

You can get into PCRDX with a minimum initial investment of $1,000. The expenses are near-average for the category at 1.19%.

Best Commodities Funds — UBS ETRACS CMCI Total Return (UCI)

If you’re looking for an ETN that can provide a solid risk-adjusted return, UBS ETRACS CMCI Total Return (UCI) can make a solid addition to your portfolio.

The past five years captures a valuable look-back period for commodities funds because 2009 and 2010 were good years for commodities as a whole asset class, whereas the past four years overall have been negative.

Looking back at performance for UCI during that time frame, the five-year performance rank places it in the top 1% of all broad basket commodities funds and the 3-year performance beats 90% of the category.

As for the portfolio, the ETRACS CMCI Total Return ETN is designed to track the performance of the UBS Bloomberg Constant Maturity Commodity Index Total Return, less investor fees. The Index is the first benchmark commodity index to diversify across both commodities and maturities. This tends to smooth out what can often be wide price swings common with commodities funds.

Expenses for UCI are a reasonable 0.55%.

As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.