If there is a time when you should feel convinced that the world runs on material things, it is when you have to make investments. Be it gold, coffee, or oil; the financial markets offer the retail investor the opportunity to invest in things or commodities. By the end of this article, you will know what an exchange-traded commodity is, and how it can help you reach your financial goals.
What are exchange-traded commodities?
An exchange-traded commodity (ETC) tracks an individual commodity or a basket of commodities on the commodities exchange. For instance, an ETC can track the value of feeder cattle (individual commodity) or livestock (basket of commodities).
An ETC is listed on the stock exchange and like stocks, can be traded. Just like a share on the stock market, an ETC’s share price can also fluctuate through the course of the day depending on the commodity it is tracking.
How an ETC performs depends on one of two factors- the spot price of the underlying commodity, or the futures price.
Benefits and features of exchange-traded commodities
Diversification opportunity
Up until 2003, the commodities market was inaccessible to small investors as the minimum investments were relatively high. With the advent of the ETC, even small investors could invest in commodities. This allows the investor to diversify their investment portfolio to improve portfolio performance.
Reduced risk
Despite being a debt instrument, ETC is relatively safe. The issuer of the ETC provides collateral- either in the form of the commodity being tracked or investments in other securities with excellent creditworthiness. So, in case the issuer defaults, the investor can recover their investment through the collateral.
No logistical storage issues
When an investor buys shares of an ETC, they do not buy the physical commodity. This means that they don’t have to worry about storing the commodity. Just think about how difficult it would be to explain all the cattle to your neighbours.
Less expense ratio
The fund manager passively manages an ETC. This directly results in a relatively lower management fee, also called the expense ratio, as compared to other actively managed funds.
Exchange-traded commodities list
Today, ETCs are listed on most major stock exchanges across the world and covers most commodities. Listed below are the exchange-traded commodities that are accessible for investors:
1. Bullion such as gold and silver
2. Metals such as zinc, copper, aluminium, lead, brass
3. Energy sources such as natural gas and oil.
4. Livestock such as feeder cattle, live cattle, pork bellies
5. Cereals, pulses, and grains such as wheat, maize, barley, and paddy
6. Spices such as coriander, cumin, pepper, and turmeric
7. Oil and oilseeds such as castor oil, palm oil, cottonseed oil, soybean oil.
8. Soybean
9. Cotton
10. Sugar
As you can see, ETCs offer a diverse range of commodities to invest.
Conclusion
An exchange-traded commodity is a good investment vehicle. To get the most out of it, keep track of the news surrounding your chosen commodity. Better yet, leverage the expertise of professionals from Angel One, one of India’s leading brokerage houses, to invest wisely.
