An exchange traded fund or ETF is very close to mutual funds the only difference being in its management. Commodity exchange traded funds invest in group of commodities which can be adjusted from time to time by the fund manager. By investing in these types of funds you can take active part in knowing the commodity market and inclusion of one such fund in your portfolio is one of the easy ways to make money.
Commodity exchange traded fund are available in many forms and sizes and the money of the investors were pooled into futures market. Depending on the amount of fund accumulated from the investors, the number of futures contracts also changes. You can buy and sell them just like a stock. Some commodity exchange traded fund buy only specific futures area like gold, oil and agriculture. As you all know, investment in gold ETF will not fetch you loss in future, since the shining metal is always in demand. Likewise, oil prices will never come down. Only we see the prices increasing with rate of inflation.
When comparing commodity exchange traded funds with equity funds in the aspect of cash flows, only 10% of investors invest in commodity ETF. Even though there is increased investment in commodity funds each year, still it lags behind in the race of equity funds. Generally a commodity exchange traded fund is purchased and sold in the stock market and the price entirely depends on the commodity in which the cash is invested. In other words, they are based on futures contracts. These funds can hold their contracts till they expire after which they are sold for buying new contracts with an extended delivery date. Basically the funds buys low-priced contract while selling the high-priced ones for making more profits and returns. Thus each time a commodity exchange traded fund sells low and buys high, it breaks away at the returns on its every roll-over period.
Commodity Exchange Traded Notes (ETN) is debt instruments which do not pay any interest and its price fluctuates according to the price index of the underlying product. Commodity exchange traded funds normally monitor the producer or the company who creates the commodity rather than the commodity. There are lots of differences in the structure of ETN and ETF even for the same product. Even for the purpose of tax treatment also they both differ.
Commodity exchange traded fund can be added to your finance plan if you wish some extra diversity in it. And sometimes the expense ratio will be high enough to crash your savings and bring down the value of the fund. It can be used as a hedge.