Physically-backed ETCs are guaranteed by raw materials deposited in the vaults of a bank hired by the issuer, therefore their value is directly linked to the spot price trend of the commodity, but may need to be converted into EUR if that is not the trading currency of the underlying.
Physically-backed ETCs allow investors to gain exposure similar to that which they could achieve by buying and keeping the physical raw material, but with the advantage of avoiding risks and costs linked to their management (warehousing, custody, insurance, etc.).
Physically-backed ETCs are the optimum technical choice if the underlying commodity has a high intrinsic value, is not perishable and proves to be easily stockable according to broadly recognised delivery standards.
Physically-backed ETCs use the same primary market mechanism as ETFs, defined as creation and redemption in kind, in which authorised participants can request the creation or redemption of the physically-backed ETCs by exchanging with the custodian the exact quantity of raw material controlled by each ETC for a determined minimum lot. This procedure ensures that the physically-backed ETCs are effectively fungible with the underlying commodities from the standpoint of both price and liquidity which is created on the secondary market, a market in which ETCs can be purchased by retail investors even in small amounts, as the minimum trading lot is just one security.
Physically-backed ETCs have a total annual commission contained and applied in proportion with the time of security possession through the reduction of the quantity of raw material that each ETC controls, while the investor is not charged an "entrance," "exit," or "performance" fee. The fair price of a physically-backed ETC can be easily controlled by any investor since it is simply given by the current price of the underlying commodity (for example, the spot price of 1/10 of a troy ounce of gold or 1 troy ounce of silver) multiplied by the entitlement (and any division by exchange rate).