Physically owned commodities vs Futures trading strategy

The third way to categorize your options is to break them into the following:

• Physically owned commodity
• Futures trading strategy

ETFs that physically own the commodity are not as common as ETFs that utilize a futures trading strategy.  Most ETFs on the market today utilize a futures trading strategy to roll front-month futures contracts.  This makes a difference in the exposure of your money to the commodity, and sometimes doesnt react in a linear fashion.  For example:  if you were to purchase a Copper ETF that physically owned the commodity, as the value of the copper goes up, so does the value of your ETF shares in a roughly linear fashion.  But owning shares in a Copper ETF that utilizes a futures trading strategy might not behave linearly, depending on other factors.  These other factors involve risk in prices along the term structure of the contract, such as a high cost to roll.  Make sure you read all the fine print of each exchange-traded fund that you are interested in buying shares in.

Keep these things in mind as you break down the different commodity ETF options that interest you.

Commodity ETF Advantages

Because the every-day investor has limited resources and doesnt have access to the trading floor, utilizing ETFs for gaining exposure in commodities markets is a great advantage of these types of funds.  ETFs can be purchased like common stock, and can be done through a broker, over the phone, or through your online trading platform.  They offer many of the same advantages of mutual funds, but with more flexibility, and without many of the built in costs.  When it comes to commodity ETF taxation, you will deal with the taxes like you would with any normal common stock.  Because of the way ETFs are structured, capital gains or losses are dealt with differently than mutual funds, which often pass along any gain to the shareholder.  That gain is then taxable, even if the gain is used to purchase more shares.  ETFs are taxed like common shares, with capital gains of the stock price being taxed after you sell or realize the gain.

This website is dedicated to providing information to investors about the different commodity ETF options out there.  Be sure to read up on each category before jumping into that particular market.  Remember that trading commodity ETFs is easy to do, so dont be intimidated by the big terms.  Take the time to learn what this type of fund is all about.  There are many advantages to utilizing commodity exchange-traded funds within your portfolio.  Good luck and happy reading!