Exchange-traded commodities (ETCs)
ETCs provide an easy, low-cost way to invest in commodities such as precious metals, agricultural products or oil.
Benefits of investing in ETCs
ETCs can enable you to invest in commodities which are hard to access as an individual investor.
- Diversify your portfolio.
- Potentially preserve wealth in times of political and economic stress.
- Potentially protect against inflation.
- Take a leveraged or short position.
How do ETCs work?
ETCs are designed to track the performance of a commodity or an index of commodities. The majority take a ‘synthetic’ approach, gaining exposure through the use of derivatives. However, some are backed ‘physically’, via direct investment in the commodity. The word ‘physical’ will often appear in the name of ETCs that do invest directly. However, if you are unsure you should read either the Key Investor Information Document or factsheet, which should tell you.
Similar to Exchange-traded funds (ETFs), ETCs are listed on the stock exchange and traded throughout the day like shares.
ETCs are low cost
ETCs generally have low management charges. Although standard dealing charges apply, there is no stamp duty to pay when you buy an ETF.
ETCs are volatile
This is due to the volatile nature of commodities, which are highly susceptible to changes in supply and demand, caused by weather, natural disasters, political instability, epidemics and many other factors. Even commodities traditionally considered as ‘safe havens’ such as gold and silver can still be volatile for example due to interest rates changes or geopolitical upheaval.
Some ETCs also allow investors to ‘short’ a commodity. Going short means the investor gains if the price of the commodity falls. Other ETCs also allow investors to gain ‘leveraged’ exposure. A double leveraged ETC, for example, would see the investor earn either double the return or double the loss of the underlying commodity. Investors should be careful here, as although there are potential gains to be made, there could be huge losses too.
ETFs for commodity exposure
While some ETCs track a basket of commodities, they tend to be used to gain exposure to a single type of commodity. Under European regulations, ETFs cannot do this as they are required to provide a minimum level of diversification, meaning they cannot hold just one type of commodity.
However, there are still plenty of ways to gain exposure to commodities using ETFs. First, there are those tracking big, broad commodity indices such as the Bloomberg Commodity Index. These are synthetic, meaning they use derivative contracts to gain exposure.
The cheapest ETF on the interactive investor platform tracking this index is the L&G All Commodities ETF GBP (LSE:BCOG), which charges 0.16%. The iShares Diversified Commodity Swap UCITS ETF (LSE:ICOM) also tracks this index for the slightly higher fee of 0.19%, as does the Invesco Bloomberg Commodity ETF (LSE:CMOD).
There are also equity-based commodity ETFs that invest in shares of commodity companies. These usually track an index of producers of a specific commodity, for example oil and gas companies or gold miners
These articles are provided for information purposes only. The content is not intended to be a personal recommendation. The value of your investments, and the income derived from them, may go down as well as up. If in doubt, please seek advice from a qualified investment adviser.