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Commodity ETFs and ETCs

Commodity ETFs and ETCs track the performance of an underlying physical commodity or commodity index. This allows investors to gain exposure to the underlying without the need to trade futures or take physical delivery of the commodity. Commodity ETFs and ETCs are traded and settled on ASX, just like shares, making them both accessible and affordable commpared to direct commodity holdings.

The principal difference between a commodity ETF and ETC lies in the underlying structure of the product. A commodity ETF is structured as a registered Managed Investment Scheme (MIS) regulated by ASIC (or equivalent scheme or vehicle operated by a foriegn entity) so that the assets that secure the entitlements of securitiy holders will be held on trust for them. ETCs are not  designed as Managed Investment Schemes (MIS) but in the form of Structured Products. With Structued Products, investors rely on the product issuer's promise to pay them, and this promise may or may not be 'secured' - entitling investors to a claim over the issuer's assets if the issuer gets into financial difficulties. Structured products are generally unsecured.

Commodity ETFs and ETCs are open-ended meaning new units / products may be created and existing units / products may be redeemed in the primary market based on market demand by the market maker or auhorised ASX participants based on demand. This unique feature helps ensure the market price of the commodity ETF or ETC tracks closely to its Net Asset Value (NAV) because it creates an arbitrage opportunity should the market price of the commodity ETF or ETC move away from its NAV.

Commodity ETFs and ETCs replicate the performance of the underlying commodity or commodities index because the issuing entity would have a direct investment in the underlying asset or derivative contract based on the commodity. As such, the investment value of a portfolio would generally rise and fall in direct proportion to the price of the underlying. This broadens the investment opportunities for potential investors because for many commodities, no listed companies exist.

Further, in certain circumstances, commodity ETFs or ETCs may be a useful hedging tool against currency risk.  Commodity ETFs and ETCs are traded and settled on ASX in Australian dollars. For underlying commodities which are valued in a foreign currency, fluctuations in the exchange rate can affect the value of the portfolio (unless the commodity ETF or ETC has an inbuilt FX hedge as a feature of the product). As such, a weak Australian dollar will increase the value of investments held in non-Australian dollars. On the other hand, if the Australian dollar rises, the value of investments held in non-Australian dollars will fall.

The first  commodity ETC to launch on ASX was an exchanged traded gold product in 2003 and the first commodity ETF was launched in 2011. 

There are now a number of commodity ETFs and ETCs available to trade on ASX offering a range of hedged and non-hedged exposures to a suite of commodities. A full range is available to view.

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