What are exchange traded commodities (ETCs) and how can you trade or invest?

What are Exchange Traded Commodities?

Exchange traded commodities (ETCs) are a type of financial product that give you exposure to commodities, either by trading or investing. They’re a type of exchange traded products (ETPs for short).

Commodities are tangible, material assets that can be bought and sold, like precious metals, oil, gas, livestock or grain. However, not everyone has the ability to directly take ownership of these things (eg a herd of cattle) and so there are financial instruments, including ETCs, which enable indirect investing or trading on these commodities.

ETCs, as the name suggests, are bought and sold over an exchange by investors and traders. They’ll give you exposure to a commodity or basket of commodities with a single position.

What affects the price of ETCs?

As ETCs track the underlying material asset, their price will be affected by anything that moves the price of the commodity itself. For example, if you’re trading on wheat, then things such as weather patterns and crop yields will impact pricing.

In terms of investing in ETCs, their buying price will be determined by their net asset value. This is influenced by the value of the underlying commodity. However, trading on ETCs – and selling ETC investments – will be determined by market conditions, so pricing will fluctuate accordingly.

Exchange Traded Commodities (ETCs) vs Exchange Traded Funds (ETFs)

Exchange Traded Funds (ETFs) are ETCs’ better-known cousin. While ETCs give you broad exposure to commodities, ETFs do the same thing with securities instead. With an ETF, you’re investing in or trading on a financial product that tracks the performance of underlying assets without you having to take ownership of any of them. These can range from a basket of stocks, bonds, a currency or currencies, to real estate and money market assets like treasury bills.

You can also track commodities using commodity ETFs. These will usually take their price from futures contracts of that commodity, rather than containing the physical asset.

Why trade or invest in ETCs?

There are a few benefits to gaining exposure to ETCs. They can help you diversify your portfolio of investments – or trades – which is always a good thing in terms of risk management.

Unlike commodities themselves, ETCs don’t require you to take ownership of the underlying asset - which is often much more practical than taking ownership of, or storing and securing, things like oil barrels or cattle. Some commodities (eg uranium) are also hard to invest in or trade on as an individual investor. ETCs provide access to these.

When you invest in an ETC with us, you’ll do so with a share dealing account. This is convenient, as you can add an ISA or a SIPPs account to that if you’re in the UK.

Mostly, you’ll invest in ETCs, but you can also trade them. When trading on ETCs, you’ll do so using derivatives like spread bets and contracts for difference (CFDs). This means that you can trade ETCs using leverage. This enables you to trade by putting down an initial deposit (called margin) to open a larger position – and your provider is loaning you the rest. This magnifies your potential profits or losses, with a smaller upfront amount.

If you’re looking to trade oil, specifically, taking a position using an ETC can be convenient. This is because you can’t trade oil on the spot, which usually only leaves futures contracts open to oil traders – and the sometimes higher fees they incur. However, with ETCs, there’s no need to use futures at all.

However, remember that you can also trading on commodities directly with us. This is the only way to trade on a commodity’s price in real time. Direct trading also often offers you lower spreads and higher liquidity.

Risks of investing or trading in ETCs

One risk you may face when taking a position on ETCs is volatility, depending on which commodity your ETC is tracking. For example, both gas and brent crude oil experienced significant volatility during the first months of 2022, thanks to the Russo-Ukrainian conflict. Some of the rarer precious metals are also known for frequent volatility.

The risks of trading in ETCs relate mainly to the amount of profit or loss you could make. As we’ve said above, if you’re trading on exchange traded commodities, these are leveraged. Although you’re only paying a small percentage of the full trade’s value upfront, your profit or loss will be calculated on the total position size. This means both profits and losses can significantly outweigh what you paid to open the position.

For these reasons, it’s important that you have a good risk management strategy in place when trading or investing in ETCs. (However, this risk won’t apply to you if you’re investing in an ETC via share dealing, rather than trading it.)

Examples of ETCs

WisdomTree Brent Crude Oil

The brent crude oil ETC issued by WisdomTree gives you broad exposure to brent crude oil as a commodity. It tracks the well-respected Bloomberg Brent Crude Subindex, which has been around since 2012.¹ Again, by gaining its exposure through an established oil index (which provides the collateral yield) you won’t have to take ownership of actual barrels of oil.

This ETC has experienced no small amount of volatility, due largely to the fluctuations in oil price caused by the Russo-Ukrainian War. Massive gains were made in July and August 2022, due to the climbing oil price, with somewhat less volatility in the months after.

Trade WisdomTree Brent Crude Oil

Invesco Physical Gold ETC

The Invesco Physical Gold ETC is an exchange traded commodity that provides exposure to the spot price of the precious metal through certificates collateralised in gold bullion.² Through this, the ETC tracks the day-to-day gains or losses in actual gold, in order to provide you with the truest broad exposure to the precious metal possible, without having to take ownership of any physical gold.

Gold has been through several ups and downs in recent years, but the Invesco ETC has provided stable returns for the bulk of it, including several upswings in volatile time periods when most asset classes’ returns were depressed.

Trade Invesco Physical Gold

WisdomTree Wheat ETC

Another one from WisdomTree, this ETC enables broad exposure to the spot price of the soft commodity. The way it does this is by tracking the Bloomberg Wheat Subindex plus a collateral return. The WisdomTree Wheat ETC is backed by contracts marked to market daily, which gives it a day-to-day correlation to the spot price of physical wheat as a commodity.³

Another one with significant volatility, Russia’s early 2022 invasion of the Ukraine sent this ETC’s wheat price skyrocketing in February to May 2022. It’s also experienced more fluctuations, both downwards and upward, since then.

Trade WisdomTree Wheat

How to trade or invest in ETCs

1. Do your research to determine what you think may be your preferred trading or investing style
2. Create an account or practise on a demo
3. Select your preferred market to invest or trade on our platform
4. Select ‘buy’ (or ‘sell’ if trading) in the deal ticket and choose your position size
5. Take steps to manage your risk
6. Open and monitor your position

With us, you can get exposure in ETCs in a number of ways. With our share dealing platform, you can invest in ETCs outright to gain broad exposure to the commodities space. If you’d prefer to trade on ETCs, we have17,000+ markets for you to speculate on, using spread bets and CFDs. You’ll trade on ETCs using either of these, or trade on commodities directly.

Investing in ETCs through share dealing

• You can invest in ETCs using our share dealing platform, meaning you’ll purchase and take ownership of ETCs
• With us, you’ll buy and sell ETFs directly for as little as £3 commission⁴
• With share dealing, you’ll pay 100% of an ETC’s asking price upfront. You’ll own the ETC outright, which means you’ll have a long exposure. This also means you can’t go short on that commodity, unless you make use of an inverse tracker
• However, unlike trading ETCs on leverage, your risk is capped when investing. You’ll earn a profit if it appreciates in value before you sell, but can only lose a maximum of the price you paid for the ETC, no more

Learn more about share dealing

Trading directly on commodities

• If you’d prefer to speculate on a specific commodity directly, rather than gain broad exposure through an ETC, you can do this too. Trade oil, gold, gas, silver, agriculture and 30+ other commodities with us
• You’ll do this using either spread bets or CFDs. This means you can go long or short. You can also trade the current commodity’s price on the spot with our special undated commodity prices or with futures to predict it’s movements later on a specified date
• When you trade commodities with us, you’ll enjoy competitive pricing. For example, get spreads from just 2.8 points on Brent Crude and 0.3 on gold. The charge will vary depending on whether you trade futures or our undated contracts. Futures have a wider spread, but no overnight funding charges – so are more cost-effective for longer-term trades

Learn more about trading commodities

Spread betting on ETCs

• Although most will trade on commodities directly rather than trade on ETCs, you can do this via spread betting. With spread bets, you’re speculating on whether you think the price of your chosen ETC or commodity market will rise or fall, rather than owning the ETC outright. This means that you can make a profit from predicting correctly whether the market rises or drops, and a loss if you predict incorrectly
• Spread betting is completely tax-free in the UK⁴
• You’ll stake an amount of capital per point of price change in the underlying ETC of your choice. You’ll make or lose that amount per point that the ETC market moves in your favour (for a profit) or against you (for a loss)
• Spread bets are leveraged trades, which means you’ll use a small deposit, called margin, to open a larger position. However, profits and losses are calculated on total position size, not margin amount, so there’s a risk that profits or losses will outweigh your initial margin

Learn more about spread betting

Trading ETCs using CFD trading

• Just like spread bets, you’d mostly trade commodities directly through CFDs, but you can trade on ETCs too
• Contracts for a difference (CFDs) are derivatives where you won’t take ownership of the ETC, but instead speculate on whether you think an ETF’s price will rise or fall, making a profit or loss depending on whether you predict correctly
• With CFDs, you’ll pay capital gains tax (CGT).⁵ However, any losses you incur can be offset as a tax deduction
• When trading CFDs, you’ll be exchanging the difference between the opening and closing price of your position. Your profit or loss is determined by the difference that the ETC’s market price has moved in your favour or against you
• CFDs are also leveraged trades, which means that your total profits or losses can outweigh the amount you paid to open the position, so ensure you’re always trading within your means

Learn more about CFDs

What is an ETC summed up

• An exchange traded commodity (ETC) is a type of exchange traded product (ETP) which gives you broad exposure to a commodity
• They differ from exchange traded funds (ETFs), a more well-known ETP, in that ETFs track securities while ETCs track tangible, material assets such as gold, oil, livestock and gas
• While ETCs help you diversify and also gain exposure to commodities you wouldn’t be able to take a position on otherwise, they’re also leveraged if you’re trading on them and are exposed to whatever volatility their underlying commodity is
• With us, you can invest in ETC funds, as well as trade on ETCs using spread bets or CFDs

Sources

¹ Morningstar Inc., 2022
² The Financial Times, 2022
³ Invesco, 2022

Footnotes

⁴ Place 3+ trades on UK ETCs or other shares in the previous month to qualify for a £3 commission rate. Please note published rates are valid up to £25,000 notional value. See our full list of share dealing charges and fees.
⁵ Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.