Exchange Traded Commodities (ETCs): at a glance
An investment that gives you exposure to a selected commodity market and is as easy to trade as shares.
A popular way to diversify an existing portfolio is to invest in commodities - such as gold, wheat or oil. While it used to be difficult for most investors to access these markets, ETCs allow you to do so and since you can trade ETCs on the stock exchange, they are easy to buy and sell.
Many ETCs track the performance of a commodities index. Investing in these can be a simple way to diversify your portfolio through a single investment. Diversifying your portfolio can help protect it from the ups and downs of the market.
If you’re considering investing in ETCs, bear in mind that their value is highly volatile when compared to investments such as shares, gilts and bonds. The price of ETCs can be influenced by factors such as drought, bumper harvests and political unrest and their value can fluctuate suddenly and unexpectedly, falling sharply as well as rising. They can also carry a number of additional factors – see the section ‘ETCs and risk’ below. All of these factors can significantly increase the risk of losing some or all of your money. If you’re unsure whether ETCs are right for you, please seek independent financial advice.
How Exchange Traded Commodities work
- ETCs are designed to track the performance of a single commodity or a commodities index, such as industrial metals or agriculture
- A large proportion of ETCs use derivatives to track commodity prices. Derivatives are financial instruments based on contracts or agreements. Their value is tied to an underlying asset or index, in this case commodity prices
- Other ETCs – especially gold and precious metal ETCs – are backed by the physical commodity itself, i.e. if you buy an ETC which invests in physical gold, then the ETC provider purchases and sells physical bars of gold to ensure the value of gold held matches the value of the ETC fund with the gold bars stored in a vault. With this type of ETC, the value is directly influenced by the price of the commodity
- Because ETCs are traded like shares, you can trade them throughout the day, every trading day
- Standard online dealing charges apply – from £5.95 to £11.95 per trade. The more you trade, the less you pay. A low Total Expense Ratio (TER) normally applies. You’ll find further information on charges on the ETC factsheet
- There is currently no Stamp Duty to pay when you invest in ETCs. However, tax rules may change in the future.
ETCs and risk
As well as some of the risks mentioned above, there are other features of ETCs that you should consider carefully.
- Many ETCs achieve their objectives through the use of derivatives - typically swaps - which carry counterparty risk. If the counterparty, i.e. the issuer of the derivatives, does not pay the sums due, or goes bust, you could lose all of your capital. If this happens you will not be protected by the Financial Services Compensation Scheme. This is regardless of the performance of the underlying assets. Even in instances where the counterparty provides collateral - i.e. sets aside assets to the value of their obligations.
Leveraged ETC and inverse ETCs
– there are some more complex ETCs available on the market. These include ETCs that offer leverage, i.e. where gains or losses can be magnified, and ETCs that are designed to perform inversely to their underlying index or benchmark, i.e. they aim to go up in value when the market falls and vice versa.
Leveraged and inverse ETCs also have unique compounding and daily reset features which can significantly increase risk.
Compounding is the cumulative effect of applying gains or losses from one time period to the sum invested, plus the gains or losses and income from a previous time period. The effect of compounding can lead to gains or losses that occur much faster and to a greater degree than with conventional investments.
The daily reset features of ETCs can also have a significant impact on returns. Because exposure to a particular index resets at the end of every trading day, performance over a longer period can often deviate from what investors might be expecting, potentially producing inferior returns.
Leveraged ETC and inverse ETCs are highly complex financial instruments that carry significant risks. They are generally designed for day traders and not suitable for investors who plan to hold them for one trading day or more. They are only suitable for experienced short-term investors who fully understand and accept these risks.
These types of ETC can exaggerate market movements and can be extremely volatile. There is a risk that you could lose all or some of your money. Before investing in any leveraged or inverse ETCs, you should read the individual prospectus carefully. See a summary table of the different levels of counterparty risks that can apply to ETCs.
Taxation - the majority of ETFs are offshore funds and specific taxation rules apply for investors subject to UK taxation. Broadly if an offshore fund has “reporting status” then gains are subject to capital gains tax. If an offshore fund does not have “reporting status” then gains are subject to income tax. Please ensure you understand the expected tax treatment fully before making an investment decision. If you’re unsure, please seek independent taxation advice.
How to invest in ETCs
You can buy and sell ETCs easily online or over the phone. Use our research tools to find out if ETCs might be right for you. You can choose from products that track the performance of:
- A single commodity – This gives you exposure to a single commodity such as gold, wheat or oil. This type of ETC is likely to be appropriate only when used to complement and diversify an existing widely ranged portfolio
- A commodities index – allows you to follow the performance of an entire group of commodities from the same sector, such as agriculture, energy or industrial metals. This type of ETC allows you to buy or sell a diversified portfolio of assets in a single transaction.
You can hold ETCs in a Barclays Stockbrokers MarketMaster®, Investment ISA or SIPP – if you hold within an Investment ISA or SIPP, you need to read the ETC factsheet to check whether it is an eligible investment for these accounts.
- The value of your investments can fall as well as rise and you may get back less than you initially invested.
- Investing is not for everyone, if you are unsure please seek independent financial advice.
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