Bounty gains from ETCs

Fancy a punt on the price of live hogs, a leveraged bet that the price of gold will fall, or even a considered investment that climate change will drive up the price of grain-based foodstuffs?

If so, exchange traded commodities might be for you. ETCs are similar to exchange traded funds that track stockmarket indices. They offer a simple way of gaining exposure to the price of a commodity without the need to buy through an account with a futures broker.

The ETC space is dominated by ETF Securities, but Deutsche Bank is now breaking into the market. The bank launched 10 ETCs in London in July, including db Physical Gold.

As with ETFs, ETCs are free of stamp duty. However, there are still costs to be borne. These include administration costs, custody charges and what is known as the monthly 'roll'. This can be positive, but it can also be negative - a bit like an ex-dividend adjustment in a share.

The other important point to bear in mind is that ETCs are collateralised, which means there is an underlying contract or physical commodity backing the security. This means the risk that the creator of the ETC, or the commodity market-maker, might default is less significant.

Good exposure

The big attractions of ETCs are the single trade exposure they give to an underlying commodity that would otherwise be hard for private investors to access.

As there are also short ETCs, it is possible to conduct pairs trading if you believe the price gap between gold and silver might narrow, for example.

I have tended to avoid commodity investment in anything other than gold. However, many individuals invest in commodities without being aware of it - share prices of oil and mining companies and food producers are all somewhat dependent on commodity prices.

But with ETCs what you see is what you get. They are free of the complicating factors of stockmarket sentiment, management bust-ups or dodgy finances.

Contrast the gyrations in BP's price with the oil price over the past month, for instance. The sterling price of Brent Crude has barely moved, but BP's share price has fallen 32%.

This article was originally published in Money Observer - Moneywise's sister publication - in August 2010