What is an Exchange-Traded Commodity (ETC)
An exchange-traded commodity (ETC) gives traders and investors exposure to commodities (called the underlying) in the form of shares. Traded like a stock, i.e. bought and sold on a stock exchange, ETCs track the price movement of commodities — such as oil, gold and silver — and then fluctuate in value based on those commodities. ETCs may track individual commodities and/or a commodity basket. An example of a commodity basket ETC is one that tracks multiple metals (not just one) or tracks a group of agricultural commodities, such as wheat, soybeans and corn. Exchange-traded commodity funds enable investors to have easier and cheaper exposure to commodities. They also relieve investors from the risk of having to play the futures market or the risk of having to take delivery of the underlying commodity itself.
Breaking Down Exchange-Traded Commodity (ETC)
The way ETCs are structured varies based 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. These ETCs track a commodity price, but the ETC itself is actually a debt obligation called a note. 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.
Exchange-Traded Commodity Features
ETCs charge a management fee, the expense ratio, which compensates the company running the ETC. ETCs provide a net asset value (NAV) which is fair value of the ETC. Since the ETC is traded on an exchange, its value on the market may fluctuate above or below the NAV value.
Inverse ETCs are more complex instruments, which 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.
Exchange-Traded Commodity vs. Exchange-Traded Fund
Exchange-traded commodity funds allow investors to focus on a single commodity, whereas exchange-traded funds tend to be invested more broadly over a wide variety or securities or companies. ETCs trade on exchanges just like ETFs and other securities, though ETCs do not represent a fund asset and are therefore not protected in case of bankruptcy; they are a debenture of the ETC provider. Issuers use collateralization to reduce their risk. ETCs are especially handy for investing in livestock, precious or industrial metals, natural gas and other commodities.
Exchange-Traded Commodity Performance
The performance of an ETC may be based on one of two sources; either based on the spot price (price for immediate supply) or based on the future price (price for the supply at delivery at a future date) of a basket of commodities or a single commodity. ETCs typically attempt to track daily performance of the underlying commodity, but not necessarily long-term performance.