The most popular type of commodity ETFs are futures ETFs. These ETFs form a portfolio of futures, forward and swap contracts on the underlying commodities. The advantage of a future-based ETF is that the ETF does not incur any costs associated with holding and storing the underlying commodity. However, there are other risks that relate to the futures contracts
themselves.
The second structure for commodity ETFs is futures contracts. These are traded on stock exchanges, similar to stocks and bonds, and do not require storage like physical commodities. When a futures contract approaches the delivery date, the holder will usually conclude that contract in exchange for another contract for the same commodity that will be delivered in the future. ETFs are cheaper investment options than physical gold, making them more attractive to some
investors.
They may also be more convenient. Since the gold futures contract was part of a mixed division and the sale of this position not covered by Section 1256 would result in no long-term capital loss, the loss recognized when the gold futures contract was terminated is treated as a long-term capital loss of 60% and a short-term capital loss of 40%. A gold ETF can include futures and options, physical gold, gold mining stocks, logistics companies tied to gold, and anything else that falls into that “basket of potential gold investments.” Imagine that instead of buying expensive gold coins or bars, you could invest in a smaller amount of gold without having to worry about storage
.
If you want to invest in gold but find the drawbacks of ETFs too great, physical gold may be more attractive.
