Exchange Traded Commodities - Meaning, Types, Benefits

Have you ever considered how people invest in commodities such as metals, pulses, oil, and other raw materials without purchasing or storing them physically? That is where Exchange Traded Commodities (ETCs) come into play. A Commodity Exchange that allows investors to easily purchase commodities in the same way that they would buy stock from their devices. ETCs are financial securities traded on stock exchanges that track commodity prices such as gold, silver, crude oil, and agricultural goods. 

Let’s explore what an Exchange-Traded Commodity (ETC) is, the types of commodities you can trade, the key benefits and risks, and how to start investing to meet your financial goals.

What are Exchange-Traded Commodities?

Exchange Traded Commodities (ETCs) are a type of debt financial instrument that allows investors to trade commodities such as metals, agricultural products, crude oils, and pulses on stock exchanges. Unlike ETFs (exchange-traded funds), which allow investors to trade baskets of commodities, an exchange-traded commodity (ETC) focuses on a single asset or a specific commodity exchange, enabling investors to participate in commodities trading by investing in individual commodities and precious metals without the need for physical storage or ownership

List of Exchange Traded Commodities

The list of commodities traded on exchange-traded commodities is displayed in the table below:

Types of Exchange Traded Commodities in India

Here are two types of exchange-traded commodities in India:

1. Physical ETCs 

Physical ETCs are a type of exchange-traded commodity (ETC) that is backed by actual commodities. Precious metals like Gold, Platinum, and silver are physically secured and show the spot price of the commodity transaction.  For instance, actual gold bars are kept in the treasury of the trustee as security for physically secured gold, etc. Hence, removing the issuer risk when it comes to physical ETC. Apart from the precious metals, some industry metals like nickel and copper, ETCs, are also backed physically.

2. Synthetic ETCs

The financial or synthetic commodity market is not directly associated with commodity trading but rather with derivative contracts like futures and swaps, whose underlying assets are commodities. Unlike physical ETCs, they do not involve direct exchange of commodities. Instead, these instruments are used for hedging, speculation, and portfolio diversification. Some commonly traded synthetic ETCs are gold, crude oil, base metals, and agricultural products. 

Benefits of Investing in Exchange Traded Commodities

Some of the potential benefits that an investor can get when investing in ETCs (Exchange Traded Commodities):

• Diversification - As of 2003, large investors could access the commodities market, with relatively high minimum investment requirements. After ETCs were introduced, etc investment has made it possible even for small investors to access commodities through platforms like the multi-commodity exchange, helping them diversify their portfolios across asset classes, sectors, and regions, and enhance overall portfolio performance.

• Minimise risk – ETC, as a debt instrument, is thought to be relatively risk-free. This is because companies that provide ETC with valuable collateral (such as gold or other safe investments) will protect investors. If the company fails to repay the investors, they can still recover their money by selling the collateral.

• No Logistics – Investors holding ETC shares do not need to worry about storing them because they are not purchased and held physically. 

• Lower expenses - ETC has lower management fees or expense ratios than actively managed funds because it is passively managed by a fund manager.

Risks or Limitations of Exchange Traded Commodities

While Exchange Traded Commodities offer several benefits, they also come with risks that investors should consider. Below are some of the key risks:

• Market fluctuations – Commodity prices fluctuate due to a variety of factors such as demand and supply, economic conditions, natural disasters, and geopolitics, and investors may lose money if the commodity price falls below their purchase price.

• Compliance Risk – ETCs are subject to stock exchange rules and regulations, which are subject to change from time to time. These changes may have an impact on the ETCs' performance, availability, liquidity, and taxation.

• Problem with tracking – ETCs may not reliably monitor the performance of the commodities for a variety of reasons, including fees, costs, liquidity, etc. Investors can see a difference between the ETC returns and the actual returns of the commodity.

• Counterparty Risk – Synthetic ETCs rely on derivatives contracts with counterparties who have the responsibility of monitoring the commodities' performance. Investors risk losing their money if the counterparty defaults on its commitments.

Exchange Traded Commodity vs Exchange Traded Fund

The table shows the differences between exchange-traded commodities (ETCs) and exchange-traded funds (ETFs):

Exchange-Traded Commodities vs Direct Commodity Investing

The table shows how exchange-traded commodities are different from direct commodity investing:

Who Should Consider Exchange Traded Commodities (ETCs)?

The list below shows who can consider investing in ETCs:

• Those small investors are looking to diversify and improve their portfolio performance with a low investment requirement.

• When an investor wants to hedge against inflation, they can invest in commodities like gold, silver.

• Traders accustomed to stock-like liquidity, looking for flexible access to commodities

How to Invest in Exchange Traded Commodities?

The following steps should be followed to invest in ETCs:-

• Step 1: Begin by opening a trading account with a SEBI-listed broker that offers commodity trading. To enable the commodities trading option, fill out an additional form after opening the account. 

• Step 2: You must maintain an adequate balance in your commodity trading account. The margin amounts differ between standard and MIS trading. The margin is lowest in the case of covered orders.  

• Step 3: The next stage is to create a shortlist of commodities that you want to trade. The chosen commodities can be pinned to the watch list for quick monitoring.  

• Step 4: After picking the commodities, an order is placed for the shortlisted commodities, and a trading method is selected. Trades are carried out using either a limit or market order.

• Step 5: The next step is to see if the order was placed or not. This can be accomplished by reviewing the order book. To access the order book, click on the orders tab, where all orders can be viewed. 

• Step 6: The next stage is to closely monitor the position of the commodities and make modifications as needed.  

Future of ETCs in India

With rising investor interest, regulatory support, and technological growth, ETCs in India are set for rapid evolution. Here’s what could shape their future:

• Growing Energy Commodities: It is anticipated that India's growing energy requirements will increase demand for energy commodities such as natural gas, crude oil, and renewable energy sources. Government initiatives supporting renewable energy will also be very important.

• Confirmation with the Global Market: The commodity trading industry is anticipated to get more advanced and conform to international norms as India's integration with international markets develops. Increased foreign investment will raise liquidity levels.

• Agricultural Commodity Growth: India is one of the top producers of agricultural goods in the world. Government initiatives and advancements in agricultural technology are expected to boost the demand for agri commodity segments, leading to greater participation in etc commodities and expanding the overall agricultural market.

• Enhanced Risk Management Tools: With technological advancements, traders will have access to more sophisticated risk management tools. Al and ML will enable better prediction of market trends and more effective strategies to mitigate risks.

Conclusion

ETCs are a great alternative for people looking to diversify their investments, save on storage costs, and benefit from commodity price swings.  ETCs have a bright future in India because of the rising demand for gold, oil, and food, as well as improved technology and regulations.  However, it is vital to note that ETCs are not without hazards, such as price changes, regulatory revisions, and reliance on third parties.  So, before investing, one needs to understand how they work and make wise decisions.