What is a commodity ETF & how does it work?

A commodity ETF that is structured like a partnership and owns futures contracts in commodities presents special tax rules for its investors. Each year, investors are required to report the ETF’s capital gains at a hybrid rate of 60% long-term and 40% short-term gains. This is so regardless of actual distributions from the ETF.

How many commodity ETFs are there?

There are more than 85 exchange-traded funds (ETFs) that invest in or hold commodities, such as gold, silver, aluminum, copper, heating oil, light crude, natural gas, RBOB gasoline, corn, soybeans, sugar, wheat, and zinc. Many commodity ETFs own futures contracts to gain their commodities positions, while others own the physical commodity.

How do ETFs invest in commodities?

Instead, ETFs typically invest in these commodities via futures contracts, which are agreements to buy a commodity on a future date for a specified price, with the intention of selling the contract before it expires rather than taking possession of the commodity in question.