Bloomberg Businessweek recently released this article which outlines the many risks to investing in Commodity ETFs. The main risk/problem identified is contango, which is a market condition whereby contracts for future delivery of a commodity are more expensive than near-term contracts for the same commodity. When ETF managers have to roll their contracts over, they are forced to buy the more expensive contacts. Otherwise, they would have to take delivery of the commodity itself. This process eats away at the ETF's value.
In order to invest in commodity ETFs, and honestly any security, you need to be aware of the risks. In this case, contango is a large risk. However, the article failed to mention anything about normal backwardation, which is the opposite of contango and works in an investor's favor.
Commodities are an area where I would possibly favor an actively managed fund over a passive index due to a manager's ability to navigate contango issues. There are many mutual funds out there currently that do exactly this. However there are no ETFs that actively manage commodities at this time (to the best of my knowledge). There are a few in the pipeline, so look for those in the next few months.
The bottom line is to always be aware of your risks when investing. Commodities can be a great way to diversify your portfolio and hedge against inflation, but be aware of the specific risks to this asset class.
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