ETCs, the abbreviation for Exchange Traded Commodities, are the easiest way to invest in raw materials and precious metals: if used at the right time, they are a valid alternative to the best known ETFs.
ETCs (Exchange Traded Commodities) are financial instruments that are issued by an SPV (Special Purpose Vehicle), which allows you to invest directly in the performance of one or more raw materials, such as gold, oil, gas or sugar. This type of investment therefore allows you to operate without physically owning the asset, but by exploiting its advantages and increasing the investor’s trading opportunities.
An ETC passively reproduces the performance of the asset and allow the investor to operate on a single raw material. Exchange Traded Commodities therefore offer one more chance than similar ETFs. ETCs are traded on the main stock exchanges and there are numerous types. With a view to diversifying the portfolio and with the right timing, ETCs are an interesting tool to access a market that would normally be closed to us.
Difference between ETF and ETC
ETFs need to diversify investments. This means that there cannot be an ETF on a single commodities or a single precious metal. We can find ETFs that invests in baskets of multiple commodities or metals, but to invest in a single commodity you must invest in ETCs.
Another important difference between ETCs and ETFs is that the Exchange Traded Funds are issued by a fund with all the controls and guarantees in the event of the issuer’s insolvency. Exchange Traded Commodities, on the other hand, are issued by individual companies and, as with any share or bond, the investor must have carefully evaluated the issuer risk.
Physical and synthetic ETCs
Physical ETCs (or physically-backed) provide that the issuer holds the underlying commodity, in particular the precious metals gold, silver, platinum and palladium, at the vaults of a bank in charge. Their value is therefore closely linked to the commodity price: the performance of a physical ETC is based on the spot price (immediate supply price).
Having physical ETCs is the closest thing to owning the corresponding raw material, without the costs and risks associated with storage or management. In this case, the issuer risk is practically zero.
Synthetic ETCs instead invest in derivative contracts, which may have the raw material as underlying. In this case the collateral is in the form of highly rated monetary instruments. Even more complex and risky are the ETCs structured on commodities such as crude oil, natural gas, and on soft commodities such as coffee, cocoa, sugar, corn, wheat, soy and fruit: these ETCs represent the corresponding futures. The performance of a synthetic ETC is based on the future price
Considering that futures are short-lived because they are maturity contracts, the issuer of these ETCs must continually manage their expiry and renewal in a process called “rolling”. Those who invest in synthetic ETCs must refer more to the trend of the futures market than to the trend of the corresponding raw materials and certainly need adequate skills and pay attention.