Not only have returns in commodity exchange traded funds (ETFs) been taking off this year, so have the number of available funds. They cover every conceivable commodity now, from gold and silver to coffee and cocoa.

At the end of May 2008, 36 such ETFs were on the market. In June, 19 more exchange traded notes (ETNs) were launched that give investors a way to short commodities.

The ETN format has an advantage over commodity ETFs, says Jack Colombo for Adviser Soapbox. ETFs that use futures contracts to track the index of interest are at a disadvantage since near-term contracts expire while new contracts needed to be bought. Over the medium term, this can cause the funds lose contact with their underlying index.

ETNs benefit from the fact that they’re required to track their underlying indexes; ETFs have no such requirement. Any difference is made up by the provider of the ETN. The issue ETNs have to contend with now is that of taxes: last year, the IRS ruled against the tax breaks given to foreign currency ETNs. It has yet to rule on the taxes regarding other ETNs.

To avoid dealing with the issue for the time being, Colombo suggests purchasing ETNs in tax-qualified accounts such as 401(k)s and IRAs.

A complete list of the astronomical number of commodity-focused ETNs and ETFs can be found at Seeking Alpha. Be aware of the differences between them, as some hold futures, others contain companies that derive revenue from the production of the commodity, and so on.

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.

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