Showtime for ETCs

A Innovative Form of Commodity Investments with Familiar Trading Characteristics

An independent type of security makes it easier for investors to trade in commodities. Here’s what’s special about these products, known as ETCs: The allow for direct investments in commodities – not the normal roundabout way using an index or a commodity stock – all under the proven conditions of trading with index funds.

ETC stands for Exchange Traded Commodities. These are debentures coupled to the price development of one or more commodities, either directly at the spot price or with a commodity futures contract. ETCs, like ETFs, are listed on the Exchange Traded Funds & Exchange Traded Products segment of Deutsche Börse; they are traded according to the same rules.

A Variety of Funds

Investors can choose from a broad selection of commodities. The issuers offer more than 150 ETCs that track the development of individual commodities or baskets of commodities. As is the case with ETFs, neither front load fees nor exit charges apply when trading ETCs on-exchange. The management fee for all products offered varies from 0.36 percent at the lower end of the range (Xetra-Gold) to 0.98 percent for leveraged short and long products. Interest income is not distributed, but retained, this means that it is reinvested. An overview of all ETCs can be found on boerse-frankfurt.com/etc grouped by the underlying commodities.

Liquid, transparent and cost-effective

ETC trading functions exactly like Exchange Traded Funds. Designated Sponsors agree to buy and sell shares to investors, which ensures liquidity. The continuous quotes at minimum volumes provide for price transparency and price security. The maximum spread guarantees the price quality. With these four characteristics – transparency, easy comprehension, cost-effectiveness and liquidity – ETFs have been able to establish themselves as fixtures on the world’s capital markets. Individual instruments such as the iShares DAX (DE) are among the most traded products in Europe. These advantages are now also available in commodities trading. But with a small difference: Unlike ETFs, ETCs are legally not considered funds, but instead are offered as debt securities. Consequently, the products bear an issuer risk, which means the issuer could default as debtor. For this reason, many ETC issuers generally collateralize their products, for example through physically deposited commodities or other suitable collateral.

Easily accessible commodity commitment

The issuers justify the broad offerings by pointing to the enormous interest investors have shown in the topic of commodities as ETFs. Until now, investors were only able to invest in funds tied to commodity indexes and/or commodity stocks. ETCs are closing this gap in the market. Nik Bienkowski, of ETF Securities, explains that he is pleased to be able to offer ETCs on the Frankfurt Stock Exchange with such a diverse offering of direct investments in commodities. “We’ve designed our ETCs so they are simple, secure and open-ended. We want to lower existing barriers to the commodity markets such as access, trading forms, risks, custodianship and transaction costs for a broad range of investors,” he said. By now six issuers are offring ETCs on Xetra.