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Interest in trading, stock markets, and foreign exchange is growing. However, it isn’t surprising that many are intimidated by the field’s financial jargon, concepts, and technicalities, but all hope is not lost. You can find easy-to-comprehend resources about trading, including this one.

There are many financial instruments. Trying to understand every single one can be particularly challenging. Let’s dive into the trading world by understanding a vital type of security called exchange-traded commodities (ETC).

Let’s first define what ETC is and how it works. After that, we’ll learn the benefits of this type of trading.

These questions will be answered through this article and give you information about ETC and how it can be a viable investment.

Understanding commodities and how they work in the trading world is beneficial for people planning to enter ETC trading.

Key Takeaways

  • Exchange-traded commodities are financial instruments that allow you to invest in single commodities or a “basket” or collection of commodities.
  • ETCs allow investors access to commodities that are hard to access individually.
  • ETC performance is based on the spot price, which is the immediate supply price or the future price, which is the price for the supply in the future.
  • Exchange-traded notes (ETN) are debt securities that can be risky but profitable if well-managed.

What Is an Exchange-Traded Commodity (ETC)?

We can only fully understand ETC if we know the meaning of commodity. A quick search of the definition of “Commodity” gives you the answer that commodities are items or goods you can buy or sell in a market.

Investors can trade commodities in a stock market, like the London Stock Exchange, by purchasing ETCs. These securities are like stocks, but the prices adjust according to the underlying commodity’s spot price or the commodity index.

A spot price is the actual price of a security or commodity at a given date, time, and place. In contrast, a commodity index tracks the price and returns of a basket of commodities.

Commodities like energy, oil, livestock, and precious metals can be complicated to trade individually. However, ETCs make trading these commodities accessible and easy to manage.

What Are the Main Commodities Traded?

When you check a typical stock market chart, you’ll notice many goods and services bought and sold on the floor. Commodities are a part of those traded by investors. 

Here are some of the items that get traded often in a stock market:

EnergyCrops and livestockPrecious metals
Crude oilFarm animalsPhysical Gold
Natural gasCoffeeSilver
GasolineSugarPlatinum
PetroleumCottonPalladium

Remember that the commodity prices for items involving energy have high volatility. Volatile commodities mean that prices change regularly. An example of this type of commodity is oil.

Physically Backed ETCs

As the name denotes, physically-backed ETCs are tradable goods physically stored in a bank vault hired by the issuer. ETCs that are backed physically work best if the goods have a high intrinsic value, are relatively easy to store, and are not perishable. 

Completely Collateralised ETCs (Swap Based)

There are instances where an ETC is backed by collateral, such as cash or securities from top companies, and not physical stock like precious metals. This type of ETC is checked daily by investors to determine its value.

Commodity ETCs on Futures: Rolling Profits and Losses Possible

Futures are derivative financial contracts that obligate parties to buy or sell commodities at a predetermined future date and price. ETCs for natural gas, oil, and other products may come as commodity futures. The issuer or seller of this type of ETCs is expected to trade these ETCs before expiration.

What Is the Largest Commodity ETF? 

An ETF or an exchange-traded fund is a pooled investment that acts like a mutual fund. You can track a particular sector, index, or other assets through ETF.

Statistics show that Standard & Poor’s Depositary Receipt (SPDR) Gold Trust (GLD) is the largest commodity ETF. As of 2022, this ETF commodity manages more than $66 billion. This ETF holds physical gold but allows investors’ exposure to gold without holding the actual gold themselves.

What Is the Most Diversified Commodity ETF?

Regarding ETFs, one of the most diversified commodities is the Invesco DB Commodity index tracking fund (DB). This fund contains other essential commodities in fund trades, which will show the correct property input.

The commodities traded in this commodity index are New York Harbor ULSD (ultra-low sulphur diesel), gasoline, Brent crude, WTI (West Texas Intermediate) crude, gold, wheat, aluminium, corn, soybeans, natural gas, zinc, or copper.

Are Commodity ETFs Worth It?

It would help to consider many things when determining whether a commodity ETF is worth it. One factor that makes ETFs worth it is their low-risk market. These ETFs are perfect for people who don’t want to spend on inflated prices and risk it.

How Do ETCs Work?

ETCs track the performance of a particular commodity. Most ETCs gain exposure by a “synthetic” approach through derivatives. However, some are physically backed by items with high intrinsic value, like precious and industrial metals.

ETCs are stocks that help investors access goods that may be hard or complicated to trade in commodity markets.

Oil ETF: Why There Is None in Most European Countries

The simple answer is that most European countries don’t have ETFs that may represent the performance of a particular commodity. ETFs must always be diversified to ensure a set level of diversification. These ETFs may not hold any physical commodities. 

This policy is ruled by the UCITS (Undertakings for Collective Investment in Transferable Securities) guidelines. UCITS is a collective that invests in stocks and trusts. 

How to Buy ETCs

You can easily buy ETCs and other investments through brokers who offer financial services.

The Benefits of Investing in ETCs

The art of trading is one of the growing forms of money-making activities today. This practice became popular due to the internet’s widespread use and a growing concern over inflation.

People want to find ways to still make money, despite the severe limitations due to various reasons, some personal and others out of their control. Here are some benefits of investing in ETCs.

ETCs Are Low-Cost

It’s general trading knowledge that ETCs have low management charges. Standards dealing amounts may apply, but you don’t need to pay stamp duty when buying ETFs.

For those unfamiliar with trading jargon, stamp duty is a U.K. tax on the transferring or selling of securities and shares. You don’t need to pay this tax when buying ETCs. 

ETCs Are Volatile

As defined earlier, volatility in commodities means that the prices of these goods fluctuate often. Factors that affect the volatility of a product include supply and demand, climate conditions, political instability, epidemics, and natural disasters.

All these different factors can affect the entire price of commodities; therefore, planning is always the right thing to do. You should check the ebb and flow of commodity exchange and currency exchange rates.

Furthermore, you should continually update your investment strategies to cope with the changing economic times.

ETFs for Commodity Exposure

While ETCs allow you to focus on a single commodity, ETFs also encourage investing in various companies or securities. What these financial instruments share in common is that they are traded on exchanges and the prices fluctuate based on changes in the pricing of ETC’s underlying commodities.

ETFs can’t gain exposure to a single commodity type as they must have a minimum level of diversification. ETFs can’t have only one kind of commodity; hence, the term “basket of commodities” is used.

However, you can still gain exposure to commodities through ETFs by tracking significant commodity indices like the Bloomberg commodity index, which uses derivative contracts to get exposure.

Exposure is a trading term that means the investment you’ve placed on one asset or commodity. Higher exposure means you’ve invested more money into one commodity.

You can also look into equity-based commodity ETFs that invest in commodity company shares. An example is buying shares from oil and gas companies and precious metal miners.

What Are the Risks of Investing in ETCs?

Investments always include risk and different commodities have different levels of risk. You can pour your money into one commodity. Still, every amount you spend also brings about the risk that the share or security will lose value and result in money losses. 

If you understand this and accept all the risks surrounding ETCs, investing in this type of security can be rewarding and risky simultaneously. 

Here are areas that make ETCs risky:

  • Index risk: when you invest in ETCs, you don’t place your money directly with a manager but directly place it on a commodity index. This index fluctuates according to market demands and can be hard to monitor as investors don’t have control over indices. 
  • Tracking error: There are instances where tracking exposure in products may have errors when the performances of ETCs and ETFs don’t match with the index. 
  • Counterparty risk: ETFs and ETCs don’t always hold the physical assets of the commodities they represent. Because of this, if the investment bank that provides these futures contracts or options fails, money will be lost.

 Exchange-Traded Fund (ETF) vs Exchange-Traded Commodity (ETC)

Here is a broad look at the difference between ETFs and ETCs.

Exchange-traded funds give investors access to the following:

  • Bonds
  • Equities
  • Real estate
  • Money market
  • Commodity baskets

Exchange-traded commodities give investors access to the following:

  • Precious metals
  • Single commodities
  • Commodity baskets

Real-World Examples

Here are some ETFs and ETCs you can see in the commodities market.

  • iShares Gold Trust (IAU): this trust is a type of ETF that purchases gold in exchange for issued shares. The ETF’s buyer gets a fraction of the gold held in trust.
  • iShares Physical Gold ETC (SGLN): Here, investors don’t get a piece of the gold invested—instead, the fund’s underwriters financially back the ETC with the holdings.

What Is the Difference Between ETF and ETN?

Exchange-traded funds or ETFs are similar to exchange-traded notes or ETNs, as both trade on a stock exchange and track a benchmark index. Yet, there are also crucial differences that should be noted. So what do these two types of securities entail?

What Are Exchange-Traded Notes?

ETNs are unsecured debt security that a bank issues, which differs from ETFs that hold stocks, commodities, or currencies. ETNs were first developed in 2006 by Barclays Bank. Exchange-traded notes aim to make hard-to-access commodities or instruments accessible to retail investors.

ETNs track the total return of underlying market indices or other benchmarks. These debt securities are unsecured and don’t hold any underlying asset.

Debts have higher risks as you can’t be sure that the borrowers can or will repay the debt in full. Another fact to consider is that ETNs don’t pay interest. 

What Are the Risks of Investing in ETNs?

ETNs are risky because there’s always a probability that the bank that issued the ETN can go bankrupt and not be able to pay the value of the ETN you invested in. If this happens, you lose part or all of your investment.

How to Issue Exchange-Traded Products (ETPs)

An ETP is an investment that trades on the stock market and holds similarities to mutual funds but is more flexible. ETP has three main types:

  • Exchange-traded funds: these track shares, currencies, bonds, and interest rates
  • Exchange-traded vehicles: similar to ETFs, but are usually confined to funds that solely track commodities
  • Exchange-traded notes: these are unsecured debt securities

What Are the 10 Most Traded Commodities in the World?

According to the Futures Industry Association and Intercontinental Exchange data, here is a list of the most traded commodities in the world:

  1. Brent crude oil
  2. West Texas Intermediate (WFI) crude oil
  3. Natural gas
  4. Gold
  5. Silver
  6. Copper
  7. Coffee
  8. Sugar
  9. Cocoa
  10. Cotton

Note that Brent crude oil comes from the North Sea oilfields, while the WFI (West Texas Intermediate) is one of the oil benchmarks in the United States.

References

  1. ETC vs. ETF: What’s the Difference?

https://www.investopedia.com/articles/investing/032116/how-etc-different-etf-iau.asp

  1. What Is a Commodity Index, Its Functions, Major Examples?

https://www.investopedia.com/terms/c/commodityindices.asp

  1. The ten most traded global commodities

https://www.forex.com/ie/news-and-analysis/top-ten-most-traded-global-commodities/

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