ETCs
Figure 2: ETC Growth Worldwide
Gaining Exposure to Commodities
There are a number of ways for an investor to gain exposure to
commodities. The main options for the average investor are:
(i) Indirect exposure via equities in commodity companies and
resource focused mutual funds/unit trusts.
(ii) Direct exposure through derivatives (commodity indices) and
Exchange Traded Commodities (ETCs).
Investing in the shares of commodity related companies provides
indirect exposure to the sector. However, commodity companies
also provide exposure to company management such as the bene-
fits and risks of operating mines, financial and hedging risks, and
political risk. As a result, many commodity related companies are
Sources: Morgan Stanley, World Gold Council, ETF Securities Ltd
more correlated to the general equity market than to the underly-
ing commodity(ies). Even for those companies which may be more
Exchange Traded Commodities
correlated to the underlying commodity than others, commodity
ETCs are relatively new investment tools which enable
companies are currently operating in a difficult business environ-
investors to gain exposure to commodity prices without ment. Costs are rising, there is a shortage of equipment and skilled
trading futures or taking physical delivery. ETCs are labour and risks are increasing.
designed to offer investors a simple, cost-efficient and Managed resource funds provide a similar exposure to mining com-
secure way to access the commodities market. They panies except that managed funds will have reduced volatility, lower
provide investors with a return equivalent to movements in liquidity (often end of day only) and higher fees.
their spot price (or futures prices in the case of some new If the main investment objective is to gain exposure to underlying
ETCs) less a small management fee which accrues daily.
commodity prices, then the optimal solution is direct exposure
There are approximately 73 ETCs listed globally. In the
through commodity derivatives or ETCs.
past two years, UK based investment management
In the past, one of the only ways to get exposure to commodities
company ETF Securities Limited (which created the world’s directly was through investing in commodity derivatives such as
first ETC in Australia in 2003) has listed 42 ETCs on the LSE futures. An investment in futures contracts requires a sophisticated
in a new dedicated ETC segment. level of management and understanding – higher maintenance, the
These ETCs provide investors exposure to a wide range
need to regularly roll contracts prior to expiry and financing margin
of individual commodities like copper, corn, live cattle, oil,
calls – and therefore features significant operational risks.
gold, and platinum, as well as 11 commodity indices.
As a result of investor demand and financial progress, ETC now
ETF Securities launched 6 new oil ETCs on the LSE in
exist which solve the adherent problems in equities and futures. ETCs
August, providing investors with access to different parts of
are simple to buy as they are traded daily on major stock exchanges
oil futures curve and offering investors – for the first time –
such as the LSE. They are cost effective, have no maturity date, are
the opportunity to gain direct and simple exposure to 1, 2
as liquid as the underlying commodity markets, are open-ended and,
and 3 year oil futures prices in Brent and WTI oil benchmarks.
therefore, investor demand can easily be satisfied, providing access
to commodities previously not available. But most importantly, they
Since oil was first listed on the LSE in July 2005, ETCs have
provide direct exposure and perfect correlation to the underlying
accumulated over US$200 million in assets and are listed
on five European stock exchanges – the LSE, Deutsche
markets. Due to the benefits of ETCs and the demand for commodi-
Borse, Euronext Paris, Euronext Amsterdam and Borsa
ties, Figure 2 shows the spectacular growth of these products.
Italiana. Because of their popularity, 7 leading investment
banks have signed up as Authorised Participants. ... more ETCs will develop as investors’
With a total of 8 oil ETCs available (6 new ones and 2 knowledge of commodities increases
existing ones), investors now have the choice of gaining
exposure to a range of four different maturities with
Investing in commodities provides investors with additional
varying rates of backwardation or contango.
sources of diversification which can improve portfolio performance.
The demand for new oil ETCs is a result of significant
The development of ETCs has opened up some of the oldest markets
investor interest in commodities and increased knowledge
in the world to ordinary investors. ETCs are designed to be simple so
about commodities investing. As a result, ETF Securities has
that any investor can buy and hold an ETC in normal brokerage
taken in US$1 billion of new assets in the past 9 months
accounts, and unlike futures, ETCs require no daily management.
across its full commodity offering.
ETCs are priced off underlying futures markets and as a result, ETCs
David Shrimpton, Head of Product Management and
may also provide exposure to different parts of the futures curve.
Development at the LSE, says: “Since its launch last
In the future, more ETCs will be made available as markets develop
September the market has seen over GBP 3.2 billion worth
and investors’ knowledge of commodities increases
•
of trading, demonstrating that investors are embracing the
opportunity to use these simple commodity products for
Nik Bienkowski is Chief Financial Analyst with ETF Securities in London.
portfolio diversification.”
www.etfsecurities.com
60 SEPTEMBER 2007 COMMODITIES NOW
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