What Is an Exchange-Traded Commodity (ETC)?

An exchange-traded commodity (ETC) can offer traders and investors exposure to commodities like metals, energy, and livestock. Traded in shares on exchanges like shares of stock, prices fluctuate in value based on price changes of the ETC's underlying commodities.

An exchange-traded commodity can track individual commodities or a commodity basket and can provide an interesting alternative to trading commodities in the futures market.

Understanding Exchange-Traded Commodities

ETCs are handy for investing in single markets like livestock, precious or industrial metals, natural gas, and other commodities that are often difficult for individual investors to access. An example of a commodity basket exchange-traded commodity, on the other hand, is one that tracks multiple metals (not just one) or tracks a group of agricultural commodities, such as wheat, soybeans, and corn.

The performance of an ETC is based on one of two sources. It might be based on the spot price (price for immediate supply) or based on the futures price (price for the supply at delivery at a future date). ETCs typically attempt to track the daily performance of the underlying commodity, but not necessarily long-term performance.

Exchange-Traded Commodity vs. Exchange-Traded Fund

Exchange-traded commodity funds allow investors to focus on a single commodity, whereas exchange-traded funds (ETF) tend to invest more broadly over a wide variety of securities or companies. The way ETCs are structured varies depending on the company issuing the product. Certain exchanges, such as the London Stock Exchange and Australian Securities Exchange, offer products called ETCs that have a specific structure.

An ETC is a note or debt instrument that a bank underwrites on behalf of the ETC issuer. Unlike a commodity ETF, the ETC doesn't buy or sell the commodity or futures contract directly. That note is collateralized by physical commodities, which are bought using the cash from inflows into the ETC. Using assets as collateral reduces the risk if the underwriter of the note defaults. This is similar to an exchange-traded note (ETN), except that the ETC is collateralized by holdings in the physical commodity, whereas an ETN is not.

Key Takeaways

  • Exchange-traded commodities offer opportunities to invest in markets like livestock, metals, and energies that are otherwise difficult to access.
  • An ETC can invest in one commodity or in a commodity basket.
  • Performance can be based on the spot price of the commodity or tied to a futures contract.
  • ETCs differ from ETFs because they represent a debt instrument or note and the commodities within the ETC serve as collateral for the debt or note.
  • The price of an ETC rises and falls along with its underlying commodities and, like other investment funds, ETCs charge management fees.

Exchange-Traded Commodity Features

Just like other investment funds, ETCs charge a management fee, called the expense ratio. It compensates the company for running the ETC. In addition, every ETC has a net asset value (NAV), which is considered the fair value of each share based on the value of the holdings underlying the ETC. Since shares of the exchange-traded commodity trade on an exchange, its value on the market might fluctuate above or below the NAV value.

Inverse ETCs are more complex instruments that move up when a commodity moves down, or vice versa. Leveraged ETCs are structured in such a way that commodity movements are multiplied by a particular factor, such as two or three, resulting in two or three times the volatility of the underlying commodity. Using leverage increases the potential for gains and losses when investing in ETCs.