page contents

There are now many commodity exchange traded funds (ETFs) available for trading in regular stock brokerage accounts.

The trader can use these ETFs without the margin risks of futures trading. There are ETFs that give exposure to commodities such as oil, metals, grains, livestock, coffee, sugar, and more. Some ETFs concentrate on a single commodity, while others offer exposure to several commodities.

The trader must be aware that ETF share price movements might not track exactly with commodity prices. ETFs are freely traded, so they reflect the willingness and availability of buyers and sellers.

Commodity ETFs are not all set up the same way. Most are based on tracking futures prices in some way, although some types actually hold a portion of their assets in the physical commodity.

ETFs are generally a promise by the fund management organization to follow the rules set out in the prospectus, and their soundness is dependent on the stewardship of the management. The possibility exists that a fund can be shut down without notice and the remaining funds distributed to shareholders.

ETFs generally do not represent ownership of a commodity, but are a promise by an institution to try to track the price of the commodity in some way.

We use ETFs as trading vehicles rather than investments.

Commodity ETFs provide a convenient way for traders to participate in commodity speculation.

Some of them have become very popular among day traders. This is especially true of the leveraged ETFs.

However, some of the existing commodity ETFs have very low volume, which means low liquidity. These might be more suited to a longer term trade. For example, if one wanted to speculate that nickel prices will go up in the next two months, there is an ETF for that, but it has had very low volume.

The basic commodity ETF simply tracks the price of the commodity, most commonly with futures contracts. However, there are also some leveraged ETFs with 2X or 3X leverage to the price. The trader must be aware that these leverage levels are only achieved for one trading day at a time, and the fund must re-balance each day. So the 2X or 3X goal is intended for day traders. Over the long run, if the price of the commodity remains constant, leveraged funds will lose significantly, due to their use of options and other leverage each trading day. Time decay will happen with any fund, due to management fees, time decay of futures contracts and other costs, but this loss is magnified in leveraged ETFs.

There are several leveraged 2X and 3X ETFs that have huge daily volume. For the day trader, they offer a significant opportunity for speculating by using sophisticated trading techniques and systems.

There are also inverse ETFs that offer speculators and traders an opportunity to go short. That way the trader can buy an ETF in order to sell the commodity. You can go short without a margin account. These inverse ETFs also come in 2X and 3X leveraged versions. Some of the inverse ETFs have very high volume for day traders.

Some commodity ETFs that represent futures contracts have special tax treatment, so be aware of this at tax time. You might get an extra form or two to use in tax preparation.

There is nothing difficult about it from our experience, but you might deal with a Schedule K-1 Form. These are usually sent out in March to the traders for use in filling out Form 6781 Gains and Losses from Section 1256 Contracts and Straddles as part of their tax return. The IRS has been calculating Form 6781 gains on futures contracts by using the 60/40 rule regardless of holding period. Sixty percent of profits are taxed as long term capital gains and forty percent as short term capital gains.

ETFdb.com is a great place for finding and sorting prospective ETFs to follow.  Top Commodity ETFs