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.
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
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
A type of derivative often lumped together with options, but slightly different. The original derivative was a future used by farmers to set the price of their produce in advance before they sowed the seeds so that after the harvest, crops would be sold at the pre-agreed price no matter what the movements of the market. So a future is a contract to buy or sell a fixed quantity of a particular commodity, currency or security (share, bond) for delivery at a fixed date in the future for a fixed price. At the end of a futures contract, the holder is obliged to pay or receive the difference between the price set in the contract and the market price on the expiry date, which can generate massive profits or vast losses.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.
An Exchange traded fund is a security that tracks an index or commodity but is traded in the same way as a share on an exchange. ETFs allow investors the convenience of purchasing a broad basket of securities in a single transaction, essentially offering the convenience of a stock with the diversification offered by a pooled fund, such as a unit trust. Investors buying an ETF are basically investing in the performance of an underlying bundle of securities, usually those representing a particular index or sector. They have no front or back-end fees but, because they trade as shares, each ETF purchase will be charged a brokerage commission.