Introducing ETCs

An exchange-traded commodity (ETC) is an investment vehicle that tracks the performance of a single commodity or index. 

As a sub-set of exchange-traded products (ETPs), ETCs, which are listed on exchanges, provide access to investors that cannot access spot or derivatives markets in areas such as metals, energy and livestock. 

ETCs vs ETFs: Key differences

ETCs are debt instruments and the commodities tracked by the ETC serve as collateral for the debt note. 

They allow investors to gain exposure to a single security such as gold. ETFs, on the other hand, need a minimum level of diversification under UCITS regulations and cannot hold physical commodities. 

Depending on the commodity, ETCs can either track the spot price or the futures price which is a contract that has a set expiry date for future delivery. 

Physical backing vs futures contracts

The structure of ETCs can vary. Some are physically backed by the underlying commodity such as gold ETCs that store gold bars in a vault. 

For commodities that are a challenge to store such as livestock or oil, ETCs will invest in futures contracts. 

ETCs that invest in the futures market are required to roll from one contract to the other before the contract expires which introduces contango and backwardation. 

Transparency and trading benefits

As the performance of ETCs is directly linked to their underlying commodities, this allows for a higher level of transparency. 

Just like other ETPs such as ETFs, ETCs trade on exchange so offer the same benefits of intraday trading and a secondary market. 

They differ from ETFs in that the capital invested in an ETC is not a fund asset that is protected in case of insolvency of the issuer, a fact that introduces issuer risk. 

Final word

Overall, ETCs are a transparent vehicle that offer exposure to commodities such as gold or oil that are typically challenging to access for investors.