Commodity-focused exchange traded funds (ETFs) are composed and perform differently from their equity-based forebears. Keep in mind commodity ETFs have different tax implications than the equity ETFs.  Equity ETFs generate a capital gain or loss at the time the shares are sold and may (but not usually) have capital gain distributions at year-end.  Commodity-based ETFs with futures contracts generate tax bills yearly, based on the income generated from futures, such as when contracts are rolled over. Investors must pay taxes for an ETFs appreciation as if it was sold at the end of the year. Jesse Emspak for Investor’s Business Daily reports that usually around 60% of the gain is treated as long term and 40% for short term.

The tracking styles of the two types of ETFs differ, too. Just because the market price of the commodity went up doesn’t mean the ETF went up with it. The reason has to do with a relation of the physical commodity, the amount stored in inventories, and what investors expect to get delivered. This is where the volatility comes in that investors don’t expect.

Knowing what you are buying is important, so do the homework and make sure the investment fits with your portfolio, investment goal and tax planning.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.