Exchange traded funds continue to increase in number and popularity, growing to one of the most commonly traded securities on the stock exchange as both institutional and the average retail investor gain greater access to broad or specialized market exposure. Yet many individuals are unfamiliar with ETFs’ inner workings. In this ongoing series, we hope to address your questions and help shed light on the investment vehicle. [What is an ETF? — Part 24: Commodity Producers]

Investors are well versed in traditional stock and bond investments, and during tax season, individuals typically know what is to be expected. However, with commodity ETFs, investors should be wary of some quirks.

For instance, if you are sitting on a commodity futures-based ETF, you may have gotten a Schedule K-1 instead of the typical Form 1099 that comes with other “1940 Investment Act” index ETFs.

Schedule K-1s come with any investment in a “Limited Partnership,” which most futures-based ETFs are structured under. Investors will usually be taxed at a 60% long-term capital gains rate and a 40% short-term rate. Additionally, unrealized gains on futures-based ETFs are marked-to-market annually – contracts held within the funds are taxed at the market value regardless of maturity at the end of the year.

Physically-backed precious metals commodity ETFs are structured as “Grantor Trusts” and are taxed like any other collectibles, which come with an ordinary income rate of up to 28%. If the precious metal ETF is held for less than a year, short-term rates can be up to 35%. Shares of physically-backed gold, silver, platinum or palladium ETFs represent a fractional ownership of the physical bullion, so the investments are taxed as if an investor held the physical metal. [What is an ETF? — Part 22: Commodities]