Something Different: Commodity-based ETFs

In this post, I am going to address a different topic related to speculating about gas prices:  Commodity-based ETF’s.  Early this year, I was posting about the US Gasoline Fund ETF (ticker symbol:  UGA).  If you have a strong opinion about gas prices, you could use this ETF to make money.  Except there are some unexpected tax consequences that I learned about recently due to a short-term “investment” of mine in an agricultural ETF called DBA.

Commodity and currency ETF’s make or lose money by investing in contracts (such as the NYMEX gasoline contracts).  They are treated as “pass through” corporations meaning that the expenses and profits of the corporation are passed on to the owners for tax purposes. So, instead of the ETF paying income tax on its profits in these contracts, if you own some ETF shares, you do!  At the end of the year, you get a K1 form that says, “Your share of the profits this year is $600.”  You have to fill out an extra tax form for this and declare it as income.  If the ETF lost money, then you get a write-off you can use.  This is all independent of the price of the ETF or any dividend payments.

Regular stocks don’t work this way.  If you buy shares in IBM, then IBM deals with these types of profits and losses, and you only have to worry about how the price per share has varied, and dividends.

For me, the upshot is that as much as I might want to buy UGA each December and hold it until August, I don’t want to deal with all of nonsense that goes with it.  But looking back over the decade, that has been a good trade most years.

Disclaimer: None of this should be considered tax advice.  I don’t have any financial interest (long or short or anything else) in UGA.

2 Comments

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  1. Ed, this just goes to show that “investing” is not always what it seems. ETFs were originally invented for index investing like VTI (Vanguard Total Stock Index), which is meant for long term buy & hold, and is structioded to be tax-efficient.

    But once they were recommended, a huge variety of “junk-grade” ETFs have appeared over the years, which are meant for speculation, not iinvestment, and carry similar risks.

    Let the buyer beware! Get both good investment advice and good tax advice.

  2. Good point, Pat. And then there are those scary triple-leveraged ETFs!

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