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Exchange Traded Commodities (ETC) are financial instruments issued against a direct investment by the issuer in commodities or commodities derivative contracts. The price of ETC is, therefore, directly or indirectly linked to the performance of the underlying. Similarly to ETFs, the ETCs:

  • are traded on the Stock Exchange like the shares;
  • passively track the performance of the commodity or commodity indices to which they refer thus being fully entitled to being included in the family of “passive instruments”.

With ETCs investment opportunities are extended: the investor may take position on one single commodity (gold, oil, gas, sugar, soybean, zinc...), while ETFs can’t do it because they must ensure a certain degree of diversification in compliance to UCITS IV (Directive on Undertakings for Collective Investments of Savings ).

The ETCs, in fact, are not UCITs but they are rather securities without maturity issued by a vehicle company in relation to an investment in the commodity to which they refer or an investment in commodities derivative contracts entered into by the issuer with high standing international dealers.  What assimilates ETFs and ETCs is the existence, for each class of securities, of a primary market and a secondary market. The primary market, accessible exclusively by authorized participants, permits the subscription and redemption of the securities on a daily basis at the price of the official value of the ETC (the possibility is provided for physically backed ETCs to make the subscription also in kind, i.e. delivering to the issuer directly the commodity). The secondary market is represented by the Stock Exchange, where all the other investors may trade the ETCs for the price determined by the best bid and ask orders inserted on the trading book. The creation and redemption procedure on the primary market permits authorised intermediaries to make arbitrages, which cause that the price of ETCs on the secondary market is always constantly aligned to the market value of the underlying commodity as it happens for ETFs: then, the risk of buying (selling) an ETC with a higher (fewer) price than the market value of the underlying is reduced, but this risk can't be excluded.  

Main Features

Thanks to continuous trading of ETCs, the ETFplus market makes it possible for all investors to access the commodities market in a simple, transparent manner and with high liquidity. In synthesis, an ETC permits:

  • To access the commodities market directly: The ETCs replicate the performance of a single commodity or commodities indices, thanks to the direct investment by the issuing company in the commodity or commodity derivative contracts. In the latter event the ETCs enable investors to have an exposure similar to the one that would be obtained through a long position in futures contracts without leverage. 
  • To remain constantly aligned to the performances of commodities: Differently from a position in futures, ETCs do not entail the need to re-position from a futures contract to another, require no margin, and do not entail any brokerage/replacement expenses of derivative contracts approaching maturity because these activities are already incorporated within the instrument. Finally, physically backed ETCs, enable investors to avoid the charges and the risks linked to commodities storage.
  • To obtain exposure to a total return: In the event of ETCs linked to the price of commodity futures contracts, the investor has access to a total return comprising three different components:

                  - Spot return: this is the return deriving from the fluctuation of the price of the future on the underlying commodity
                  - Return linked to the rolling (that may be positive or negative): this is the return associated to the replacement activity of futures contracts at maturity, which permits to maintain the position on the underlying, and is negative (contango) when the contract arrived at maturity has a price lower than the following one, or positive (backwardation) in the opposite event; 

                 - Return of the collateral: this is the interest obtained from the investment of the collateral (the purchase of a future does not require, in fact, any investment other than the maintenance of a margin, which is, however, also remunerated). 

Finally, considering that a large part of commodities are handled in dollars, the value of investment will be positively or negatively affected by the performance of the EUR/USD exchange rate.

  • To access the commodities market at a low cost: Like for the ETF, the investor is charged no  “Entry”, “Exit” and “Performance” fees, management fees are low and are applied in proportion to the time during which the security was held through a reduction in the quantity of the commodity to which one is entitled. Finally, like for the purchase of any other security on the market, only trading fees applied by one’s own bank/broker must be considered.

Investment modalities

The range of commodities replicated by the ETC is very broad and does not limit itself to single commodities, but extends to their indices and sub-indices. All this allows the investor, depending on his expectations and his propensity towards risk, to bet on the performance of an individual commodity and to obtain a well diversified position on a basket of commodities purchasing:

  • more ETCs on individual commodities (Aluminium, Coffee, Copper, Corn, Cotton, Gasoline, Gold, Heating Oil, Brent Oil, WTI Oil, Lean Pork, Live Cattle, Natural Gas, Nickel, Silver, Soybean Oil, Soybeans, Sugar, Wheat, Platinum, Palladium, Cocoa, Tin, Lead and Zinc);
  • ETCs on indices linked to homogeneous baskets of goods (Agricultural Products, Energy, Cereals, Industrial Metals, Cattle, Oil, Precious Metals, etc.);
  • ETCs on global commodities indices;
  • ETCs on forward commodities indices.

Like for the ETFs, thanks to the trading on the stock exchange, also the ETCs permit a broad flexibility of use, causing them to be instruments suitable for any expectations on the evolution of the markets or needs of investors. They may be used, in fact, both for short-term trading, for the purpose of catching the movements of an individual session on the Stock Exchange, and for investments with a long time horizon, considering that ETCs have no maturity. Finally, if one’s own intermediary so allows, they may be short-sold in order to profit from a bearish trend or they may be bought with leverage effect.

Last update:  February 17 2012 - 18:23