Twelve Things You Need to Know About ETFs

By Ben Steverman - 2012-02-27T22:16:37Z

Illustration by Dennis Pacheco

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How do commodity ETFs work?

It's not feasible for ETFs to store commodities such as natural gas or pork bellies. Most commodity ETFs use derivatives, which can trade quite differently from the day-to-day spot price of a commodity. In 2011, the U.S. Natural Gas Fund (UNG) dropped 46 percent, 17 points more than natural gas prices fell. Broad-based commodity funds, such as those based on the 19-commodity Dow Jones-UBS Commodity Index, can ease these concerns, Jennings says. Another choice is commodity ETFs that hold the physical material, such as the $71 billion SPDR Gold Trust (GLD). Investors can also buy stocks of commodity producers through such ETFs as the Market Vectors Agribusiness stocks (MOO) and Gold Miners (GDX) funds.

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