Why choose Exchange Traded Commodities (ETCs)?
ETCs give you access to hard-to-reach commodity markets, allowing you to diversify your portfolio. They are easy to buy and sell, but the level of risk they represent can vary, depending on the underlying investments.
Access hard-to-reach commodity markets with a wide range of opportunities
ETCs closely track the performance of a commodity index or single commodity, or you can invest in a range of commodities – such as gold, wheat or oil – without needing to buy the commodity itself, so it’s possible to gain exposure to commodities without the complexities of direct investment. Investing in ETCs means you can buy and sell them at any time when the market is open
As with all investments, the value of ETCs can fall as well as rise and you may get back less than you initially invested. However, some ETCs carry a significantly higher risk than others of losing some or all of your money. If you’re unsure whether an investment is right for you, please seek independent financial advice.
By balancing your investments across a wide range of assets – e.g. shares, bonds, commodities, cash and more – it is possible to try to reduce your overall risk. That way a setback in one area, such as a major dip in the stock market may only affect part of your portfolio. Remember though that even balanced portfolios carry risk and you could get back less than you invested.
ETCs and risk
As well as standard risk of loss that applies to all investments, there are some additional features of ETCs that you should consider carefully.
Counterparty risk - 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 and 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, and obtain professional advice if you are unsure. See a summary table of the different levels of counterparty risks that can apply to ETCs.
Taxation - the majority of ETCs 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 are unsure, please seek independent taxation advice.
- 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 advice.
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