Commodity ETFs and ETCs

Commodity ETFs and ETCs track the performance of an underlying physical commodity or commodity index allowing investors to gain direct 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). ETCs are not however structured as Managed Investment Schemes (MIS) but rather are in the form of Structured Products.

Commodity ETFs and ETCs are open-ended securities 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. 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 the commodity derivative contract. 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. 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 ETC to launch on ASX was an exchanged traded gold product in 2003 and the first commodity ETF was launched in 2011. 

Market Making

Market Makers provide an important role in ensuring that buyers and sellers of ETFs and ETCs can transact. They provide liquidity to the market by providing quotes through the trading day and update their prices to reflect changes in the underlying securities.

ASX offers a Market Making incentive scheme to further promote tighter spreads and more liquidity in the ETF (Exchange Traded Funds) and ETC (Exchange Traded Commodity) markets. Market Making Participants receive Trading and Clearing Fee incentives from ASX when achieving minimum quoting benchmarks on a monthly basis. Each ETF / ETC is assigned a spread and liquidity requirement.

The table found in the following PDF (82KB) shows the Market Makers (MM) that have signed incentive contracts with ASX and the relevant ETF/ETCs.