The ongoing bull market in raw materials continues to drain the total returns generated by some ETFs, or exchange-traded-funds, tied to the complex.

Increasingly, the most cost-efficient way to participate in commodities is to buy and hold natural resource equities, not the underlying commodity future; though commodity futures provide a higher degree of correlation to the secular trend underway since 2002, contango is causing all sorts of price distortions and diluting the returns of some products.

Contango, or premiums paid to buy forward-dated commodity contracts, has distorted the returns of several ETFs this year as rollover costs continue to rise.

Coined the “roll penalty,” speculators and investors pay a premium to rollover from expiring contracts to the next-month contract; with demand buoyant since the credit crisis lows last year, future contract prices are becoming more expensive to carry, draining the returns from some popular commodity ETFs.

For example, the United States Oil Fund (NYSE-OIL) has seen its returns dramatically affected by rollover. The Fund, which is designed to track the price of West Texas crude, is actually down more than 11% this year while oil prices have rallied about 3%.

It’s the same story with many other commodity ETFs whereby investors are probably unknowingly footing the bill for exposure to an asset that is costing them much more than they bargained for; in some cases, losses are accumulating even though the commodity they’re betting on is rising.

Recently, some new funds have hit the market whereby sponsors have designed products that avoid rollover premiums.

But other obstacles face commodity ETF investors.

The Commodity Futures Trading Commission, or CFTC, is clamping down on what it deems to be important commodities, including oil, natural gas and agricultural commodities. Position limits were raised last year and again in 2010 to reduce speculative trades. And commodity exchanges have recently raised the margin requirements on some commodity contracts. There’s no doubting it is becoming more expensive to play the rally as everyone – speculators, retail investors and institutions – pay higher premiums.

Natural resource stocks, however, don’t harbour these anomalies. The upside is that resource shares allow the investor to participate in that commodity producer’s fortunes while, in some cases, receiving cash dividends. Stocks are liquid, low cost and allow investors to pay the entire gamut of the commodity space.

The downside is that in some years, commodity futures prices can rise as broader stock markets decline, providing poor correlation. This last occurred in 2002 as commodity benchmarks surged while the majority of resource equities got slammed in the third year of the 2000-2002 bear market.