An Exchange Traded Commodity (ETC) is an investment vehicle that tracks the performance of an underlying commodity or basket of commodities. It is a variation on the Exchange Traded Fund (ETF) that was first introduced in the US in 1993 and launched in the UK in 2000.

Exchange Traded Funds are pooled funds that are bought and sold on the stock exchange in exactly the same way as stocks and shares. Typically, each fund is set up to track the performance of an entire index, geographic market or industry sector by buying all the underlying stocks in proportion to their weighting. ETFs subsequently allow you to track the performance of these indices through the purchase of a single share in each.

ETCs work on exactly the same principle as ETFs – with the ETC tracking the performance of a single underlying commodity or a group of associated commodities. “Single commodity ETCs” obviously follow the spot-price of a single commodity, whilst “index-tracking ETCs” follow the movement of a group of associated commodities, such as cattle, energy or livestock.

ETCs - Historical Overview

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One of the biggest stories of 2006 was the global boom in the commodities markets. Exploding demand for raw materials to feed the spectacular growth in China and India drove the price of many commodities to dizzying heights. At the same time, the price of oil was inflated by concerns over the continuing conflict in Iraq and the threat of conflict between Iran and the US.
The commodities markets have traditionally been used to trade a wide variety of homogenous agricultural and industrial resources in their raw, unprocessed state, i.e. wheat and nickel as opposed to flour or steel. These markets trade everything from frozen orange juice through to cotton, gold and crude oil.

Historically the commodities markets have grown out of the need to establish prices for perishable agricultural products in the months prior to their harvest – allowing the farmers to guarantee the sale of their produce and the buyers to fix the price of their ingredients. These markets were quickly adapted to include ‘hard commodities’ such as platinum, copper and oil, as well as the ‘soft commodities’ such as grain, cotton, rubber, etc.

The commodities market was also often referred to as the “futures market” - on account of buyers using it to order resources for future delivery. Then, in the 1970s the futures markets were expanded further to include financial contracts and the term ‘commodities’ is now often used to refer to both physical commodities and financial futures.

What are the options?

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It is largely impractical for the private individual to buy and sell actual barrels of oil or lorry-loads of aluminium. The two traditional methods for investing in commodities have been:

1. Futures trading. A futures contract is an agreement to buy or sell your chosen commodity at a specific date in the future - at today’s prevailing market price. These markets are highly liquid and the contracts can be sold on again at any point before the final delivery date, i.e. the day when the farmer or miner will deliver the raw materials to the person holding the contract.

The producers and end-users are still present in today’s markets, but it is the traders and speculators who are now responsible for most of the volume that keeps the market liquid.

Advantages: The main benefit of trading futures is that you are making a direct investment into the underlying raw material and your future profit or loss is entirely dependent upon fluctuations in the underlying commodity price.

Another advantage is that most futures trading is done ‘on margin’, which dramatically increases potential profits - and losses!

Disadvantages: The main downside is that futures are traded on separate, specialist markets, such as NYMEX (the New York Mercantile Exchange), ICE (the InterContinental Exchange), and LME (London Metals Exchange), rather than on the regular stock exchanges. As such, they are not accessible for most investors.

2. Share trading. It is usually far easier for the private investor to buy shares in the companies involved in the production of the base commodities - the miners, oil exploration companies and agricultural producers.

Advantages: Most of these shares are traded on the major world stock markets and are available through your share dealer - for a commission.

Disadvantages: The share prices of the commodities companies are often distorted by the presence of non-market factors. In other words, the value of your shareholding will rarely correspond exactly with movements in the price of the underlying commodity - it will also react to management decisions, profitability, market sentiment, merger & acquisitions (M&A) rumours, etc.

It is also possible to speculate on movements in the commodities markets through the use of CFDs and spreadbetting, which offer “derivatives” of the above instruments.

Finally, the recent development of Exchange Traded Commodities (ETCs) offers a new way of gaining exposure to the world of the commodities markets.

Why trade ETCs?

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ETCs offer the aspiring commodities trader a number of inherent advantages over both shares and futures - without the associated vagaries of trading an individual stock or the dramatic risk inherent in futures trading. But please remember the value of your investments and the income from them can go down as well as up. You may not get back the full amount you have invested. ETC trading offers:

Direct exposure to the commodities markets – the value of your investment will rise and fall in direct proportion to the price of the underlying commodity
Liquidity - ETCs are ‘open ended’ securities, which are created and redeemed on-demand. This means that the supply of ETCs is unlimited and that price changes will accurately mirror developments in the price of the underlying commodity
Stamp duty & CGT - ETCs are not shares and so trades are exempt from stamp duty. Furthermore, ETCs can be traded within ISA accounts, allowing you to shelter your profit from Capital Gains Tax
Low dealing costs - ETCs are traded on the regular stock exchange, making them both accessible and affordable – they can be traded through your share dealing service for a commission.
Portfolio diversification – ETCs give broad representation across entire commodity sectors and different geographic regions.

How to trade ETCs?

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You can trade ETCs online or by phone through your stockbroker in much the same way as you would trade ordinary shares – we will quote you bid and offer prices on the ETC and you buy or sell in exactly the same way.

This whole process is fully automated and each transaction is dealt with as soon as practicably possible. ETC prices may be initially quoted in US dollars and converted to sterling when you deal.

What ETCs can you trade?

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Various stockbrokers currently offer a range of ETCs. Below is a list of 21 ETCs, with an overview of the commodity’s typical end use and the main producing countries.

Commodity	TIDM	Typical End Use	Major Producers
Aluminium	ALUM	Automobiles, airplanes	China, Russia, Canada
Brent Oil	OILB	Fuels, inc. heating oils, diesel and kerosene. Brent crude is also the pricing benchmark for oil produced in Europe, Africa and the Middle East.	UK
Coffee	COFF	Coffee. Coffee beans are divided into the more widely consumed arabica and the stronger robusta	Brazil, Colombia (arabica); Indonesia, West Africa (robusta)
Copper	COPA	Electrical wiring, construction	Chile, Bolivia, Zambia, Indonesia
Corn	CORN	Livestock feed, gasoline additives, cooking oil, sweeteners	USA
Cotton	COTN	Clothing fibres, home furnishings, medical products	China, USA, India
Crude Oil	CRUD	Fuels, inc. diesel, gasoline and kerosene; plastics, tar, asphalt, petrochemicals	The OPEC countries. Saudi Arabia, Iran, Venezuela, Kuwait, Nigeria, and the United Arab Emirates dominate OPEC’s production.
Gasoline	UGAS	Fuel for internal combustion engines	USA, Canada
Gold	BULL	Jewellery, dentistry, investment	South Africa, USA, Australia
Heating Oil	HEAT	Residential heating	Asia & Oceania
Lean Hogs	HOGS	Ham, pork spareribs	China, EU, USA
Live Cattle	CATL	Beef, veal	USA, Brazil
Natural Gas	NGAS	Heating, electricity	Russia, USA
Nickel	NICK	Stainless steel, non-ferrous metals for specialised industry & aerospace	Russia, Australia, Canada, Indonesia, Japan, EU
Silver	SLVR	Jewellery, electrical appliances, investment	Mexico, Peru, Australia, China
Soybean Oil	SOYO	Salad oil, cooking oil, margarine, paints, plastics	USA, China, Brazil
Soybeans	SOYB	Protein feed, vegetable oil, tofu, soy sauce	USA, Brazil, Argentina
Sugar	SUGA	Raw sugar, refined sugar	Brazil, EU, India
West Texas Intermediate Oil – Light Sweet Crude (WTI)	OILW	Petroleum gas, gasoline, kerosene, gas oil, lubricating oils. WTI oil also is the pricing benchmark for light sweet crude oil produced and refined in North and South America.	USA
Wheat	WEAT	Food, brewing, distilling	EU, China, India
Zinc	ZINC	Bronze, brass, batteries	Asia

Please note that not all ETC trading accounts offers tools such as limit orders, stop-loss orders and price locking.

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