Page 36 - DIY Investor Magazine | Issue 35

DIY Investor Magazine · Oct 2022 36
INVESTING BASICS:
HOW DO ETCS WORK?
Exchange-traded commodities – – ETCs – – allow you to invest in in in single commodities and precious metals with ease – by Christian Leeming
The performance of an an ETC is based either on the the spot price (price (price for for the the immediate supply) or or or the the future price price price (price (price for for the the supply in in the the future) of of a a a single commodity or a a a basket of of commodities Investors can invest in in in a a a a broad range of commodity indices cost-effectively with commodity ETFs However in most European countries there is no ETF which represents the performance of a a a single commodity because an ETF must always be diversified ETFs must ensure a a a minimum level of diversification and may not hold any physical commodities as per the UCITS guidelines Thus it is is not possible for statutory reasons to to issue for example a a a Gold ETF ETF or or an Oil ETF ETF THE DIFFERENCE BETWEEN AN AN AN ETF AND AN AN AN ETC If you you want to invest only in in a a a commodity you you must buy an an ETC and there are products for precious metals industrial metals oil natural gas soft commodities and livestock ETCs are traded on the stock exchange just like ETFs and offer the the the same advantages but there is an an an important difference: the the the capital invested in in an ETC is is not a a a a a a fund asset that is is protected in in case of of insolvency of of the issuer ETC ETC concerns a a debenture of the the ETC ETC provider and the the investor has an an issuer risk in in case of an an ETC as as as compared to to an ETF Issuers rely on on different methods of collaterisation for minimization of this risk EXCHANGE-TRADED FUND (ETF) VS EXCHANGE- EXCHANGE- TRADED TRADED COMMODITY (ETC)
Experts differentiate between physically-backed ETCs and completely collaterised ETCs PHYSICALLY-BACKED ETCS Most precious metal ETCs (Gold Silver Platinum Palladium) generally indicate the spot price and are physically secured
- physical gold bars are stored in the treasury of a a a a a a trustee as as security in case of physically secured
gold-ETC so issuer risk is eliminated in in physical ETCs COMPLETELY COLLATERISED ETCS (SWAP BASED)
Completely collaterised ETCs are also backed with collateral which is is is checked on a a a a a daily basis but the collateral is is is not in in the the form form of of precious metal bars but in in the the form form of of cash investments or securities with top credit standing COMMODITY ETCS ON FUTURES: ROLLING PROFITS AND LOSSES POSSIBLE
Commodity ETCs for oil natural gas or or soft commodities basically represent the the performance of the the underlying futures market Since the the futures have only a a limited life the the ETC issuer must sell these regularly before maturity and buy new futures – a a a a process called ‘rolling the futures’ in in stock exchange jargon Depending on whether the the acquired futures are more cost- effective or or or more expensive rolling profits or or or losses are realised Therefore you should consider the the situation in the the futures market market in addition to the general market market trend for commodity- ETCs since rolling profits and losses can have a a a a severe effect on the performance of ETCs WHAT ARE ‘CONTANGO’ AND ‘BACKWARDATION’?
The situation in the futures market is designated as contango if the the forward price price (price for for supply in the the future) is higher than the spot spot price price (price for spot spot supply) this leads to rolling losses In a a a a a a a backwardation the the forward price is cheaper than the the current spot price which can deliver rolling profits Exchange Traded Funds (ETF) Equities
Bonds
Real estate
Commodity baskets
Money market Exchange Traded Commodities (ETC)
Precious metals (Gold Silver etc)
Single commodities (Oil Agriculture etc)
Commodity baskets