# How Do Commodity ETFs Work? Physical, Futures-Based and Equity-Based Structures Source: https://www.vistashares.com/commodity-etfs-explained/ Published: 2026-11-13 | Updated: 2026-11-13 By Adam Patti, Chief Executive Officer, VistaShares | November 2026 Commodity ETFs provide exposure to raw materials such as gold, silver, oil, natural gas, agricultural products and industrial metals. They do so in three main ways: by holding the physical commodity in storage, by holding futures contracts on the commodity, or by holding shares of companies that produce or process it. Each structure behaves differently, carries different risks and is taxed differently, so two funds tied to the same commodity can produce very different results. ## How do physically backed commodity ETFs work? Physically backed funds hold the commodity itself, stored in vaults by a custodian. This approach is practical mainly for precious metals such as gold, silver, platinum and palladium, which are valuable relative to their size and do not deteriorate. Each share represents a fractional interest in the metal held. Physically backed funds track the spot price of the metal fairly closely, less the fund's expenses. They do not need to roll futures contracts. Many are structured as grantor trusts rather than registered investment companies. **Tax note.** Under current law, gains on many physically backed precious metals funds held in taxable accounts may be treated as gains on collectibles, which can be taxed at a higher maximum long-term rate than gains on stocks.[1] Investors should consult a tax advisor. ## How do futures-based commodity ETFs work? For commodities that are expensive or impractical to store, such as oil, natural gas and agricultural products, most funds hold futures contracts: agreements to buy or sell a set quantity at a set price on a future date. Because contracts expire, the fund must regularly sell contracts nearing expiration and buy later-dated ones. This process is called rolling. Rolling affects returns: **Contango.** When later-dated contracts cost more than nearer ones, the fund sells low and buys high at each roll, which can create a drag on returns over time even if the spot price is unchanged. **Backwardation.** When later-dated contracts cost less than nearer ones, rolling can add to returns. The result is that a futures-based fund's return can differ significantly from the change in the commodity's spot price. Some funds manage this by spreading holdings across several contract months or choosing contracts according to rules designed to reduce roll costs. Futures-based funds also hold cash or Treasury bills as collateral for their futures positions, and the interest earned on that collateral is part of their return. ## How are futures-based funds structured? **Commodity pools.** Some futures-based funds are organized as limited partnerships. They issue Schedule K-1 forms to investors rather than Form 1099, and gains on regulated futures contracts are generally treated as 60% long-term and 40% short-term capital gains under Section 1256 and are marked to market annually, whether or not shares are sold.[2] **Registered funds with subsidiaries.** Other funds are registered investment companies that hold commodity futures through a wholly owned foreign subsidiary. They issue Form 1099, and distributions are generally taxed as ordinary income or capital gains under the usual rules for funds. The structure is described in the prospectus and affects tax reporting, so it is worth checking before investing. ## How do equity-based commodity ETFs work? Equity-based funds hold shares of companies involved in producing, processing or transporting commodities, such as gold miners, oil and gas producers, agricultural companies or metals refiners. Their returns depend on the commodity price but also on each company's costs, debt, management decisions and the broader stock market. Equity-based funds can amplify commodity moves, because producers' profits often change more than the commodity price, but they also introduce company-specific and stock market risks. They are taxed like other equity ETFs. ## What about exchange-traded notes? Some commodity exposure is offered through exchange-traded notes, which are debt securities issued by a bank that promise to pay the return of a commodity index. They do not hold the commodity or futures directly, and investors depend on the issuer's ability to pay. Exchange-traded notes are not funds, and their risks and tax treatment differ. ## Do commodity ETFs pay distributions? Physically backed funds generally do not pay income, because metals do not generate any. Futures-based funds may distribute income from collateral and any realized gains. Equity-based funds pass through dividends from the companies they hold. ## Why do investors use commodity ETFs? Investors use commodity exposure for several reasons: diversification, since commodities can behave differently from stocks and bonds at times; a potential response to inflation, since commodity prices can rise when inflation rises; and targeted views on specific commodities. Commodity prices can also be highly volatile and can fall for long periods, so they are generally used as a portion of a diversified portfolio. Our article on [what a supercycle is in investing](https://www.vistashares.com/what-is-a-supercycle-in-investing/) discusses long commodity cycles. ## What are the risks? **Price volatility.** Commodity prices respond to weather, supply disruptions, geopolitics and demand shifts. **Roll costs.** Futures-based funds can lose value through rolling in contango markets. **Structure and tax complexity.** Partnerships issue K-1 forms, and some physically backed funds may receive collectibles treatment. **Tracking differences.** Futures-based and equity-based funds may not follow spot prices closely. **Concentration.** Single-commodity funds depend on one market. Our article on [concentration risk in ETFs](https://www.vistashares.com/etf-concentration-risk/) explains why that matters. ## How can investors evaluate a commodity ETF? Key questions include which structure the fund uses, what exactly it holds, how it rolls futures if applicable, which tax form it issues, how its returns have compared with the spot price over time, its expense ratio and trading costs, and how it fits into the broader portfolio. Our article on [how to compare two ETFs](https://www.vistashares.com/how-to-compare-two-etfs/) provides a checklist, and more introductory topics are covered in our [ETF basics guide](https://www.vistashares.com/etf-basics-guide/). Investments involve risk, including possible loss of principal. ## Frequently asked questions ### Why does my oil ETF not match the price of oil? Most oil ETFs hold futures contracts rather than physical oil. They must roll contracts before expiration, and when later contracts cost more, a condition called contango, rolling can reduce returns relative to the spot price. Expenses and collateral income also contribute to differences. ### What is the difference between contango and backwardation? Contango occurs when futures for later delivery cost more than near-term futures, which can create a drag on funds that roll contracts. Backwardation is the opposite: later contracts cost less, and rolling can add to returns. The shape of the futures curve changes over time. ### Why do some commodity ETFs issue a K-1? Funds organized as partnerships, often called commodity pools, pass income and gains through to investors on Schedule K-1. Gains on their futures are generally taxed under the 60/40 rule and marked to market annually. Registered funds that use a subsidiary issue Form 1099 instead. ### How are gold ETFs taxed? Many physically backed gold funds are structured as grantor trusts, and gains on them held in taxable accounts may be taxed as collectibles, which can carry a higher maximum long-term rate than stock gains. Gold mining stock funds are taxed like other equity funds. A tax advisor can confirm treatment. ### Are commodity ETFs a hedge against inflation? Commodity prices have sometimes risen during inflationary periods, but the relationship is not consistent, and commodities can fall during inflation as well. Futures roll costs and fund structure also affect results. Commodity funds are generally used as one component of a diversified portfolio. ## NOTES - Internal Revenue Code Section 1(h)(4) and (5) (collectibles gain); IRS Publication 550, "Investment Income and Expenses." - Internal Revenue Code Section 1256; IRS Publication 550; IRS Form 6781. ## IMPORTANT INFORMATION This material is provided for educational purposes only. It is not investment, legal or tax advice, and it is not a recommendation or an offer to buy or sell any security. Information is drawn from sources believed to be reliable as of the date of publication, is not guaranteed as to accuracy or completeness, and may change without notice. Figures attributed to third parties are their estimates. Projections and forecasts are not guarantees of future results. Investors should consult their own financial, legal and tax professionals before making investment decisions. Investments involve risk, including possible loss of principal. ETF shares are bought and sold at market price, which may differ from net asset value, and brokerage commissions and other trading costs may apply.