Commodity ETFs: Returns May Not Always Match Expectations

"The biggest negatives on these double-inverse and double-up ETFs is when the market direction is with them you make a lot of money," Boyle says. "If the market has as much volatility as we've seen, you can dramatically lose money very quickly."

Double-down bear funds can be particularly tricky for commodities because of how much futures trading can affect their performance.

Take the ProShares Ultra S&P 500

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[SSO  Loading...      ()   ], which is supposed to capture twice the move of the broad index. For 2009, the S&P 500 is up 21 percent, but the double-up ETF has gained only 29 percent— still a nice return but 50 percent less than what would be expected if the two entities had been perfectly correlated through the year.

"The problem is they rebalance it every day, so you don't get the compounding effects that one would expect if you look at the difference between doing something every day and letting the compounding effects ride over time," says Dirk van Dijk, analyst at Zack's Equity Research. "The longer the time, the bigger the diffrential will be."

Interestingly, the SSO's sister fund, the ProShares UltraShort S&P 500

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[SDS  Loading...      ()   ], is supposed to register double the inverse performance of the broad index and has been pretty well on target this year with a 43 percent drop, just more than double the index's gain.

But many double- and triple-inverse bear ETFs, especially those that trade on low volume and liquidity and have large bid-ask spreads, aren't as neatly correlated and can sting investors who hold them too long.

"It's a tactical trade, it's not a long-term investment," van Dijk says of the inverse ETFs. "Over time the rolling of futures means that the correlation will tend to break down, and of course you've got the management fees."

Another issue for ETF correlation would be pending position limits being contemplated by the Commodity Futures Trading Commission.

The CFTC is expected to pass some type of new position limits for energy trading to curb speculation that some believe is responsible for the volatility in prices.

The PowerShare Dollar Index

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[UUP  Loading...      ()   ] briefly halted trading recently over concerns about a filing for a new offering. The dollar has been tied to the rise in oil prices and gains in other commodities.

Also, the United States Natural Gas

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[UNG  Loading...      ()   ] suspended creation units over concerns on CFTC regulations.

"They took a conservative stance and said we're going to stop accepting creation units because we don't know what the future holds on position limits," Direxion's Brigandi says. "The pending CFTC position limits will have some type of effect on the commodities ETFs."

Still, Brigandi says ETFs are a preferable strategy to physical posession of most commodities despite their challenges.

"For a retail investor that wants to get exposure to commodities, the ETFs right now are the best way. They're liquid, they trade in the secondary market and they're transparent for the most part," he says. "Investors just have to do their homework."

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