What is an ETC?

How do commodity ETCs work?

There are two main ways ETCs track a commodity or currency:

• Physical ETCs – these buy and store the commodity in vaults or warehouses. This is common in precious metals like gold or silver.
• Synthetic ETCs – in some cases buying and storing a commodity is difficult or impractical. For example, wheat and similar commodities which perish over time. Instead, a synthetic ETC will agree to purchase or sell a certain amount of a commodity at a fixed price or rate at a time in the future. If the exchange rate or commodity price changes, the value of the contract will too. This is known as a futures derivative.

As the end of one contract approaches, the ETC will then start another and keep going. Synthetic ETCs are higher-risk investments. Many are only designed for investors to hold for a short period of time. Over longer periods the performance of a synthetic ETC will not always match that of the commodity it tracks. As such, they’re only suitable for people with a high level of knowledge and experience, and who are able to accept the extra risks.

How do currency ETCs work?

Most currency ETCs follow a currency index by using a type of derivative called a futures contract, which tracks an exchange rate. The ETC enters into an agreement to exchange a certain amount of currency at a fixed rate at a time in the future. If the exchange rate increases or decreases in the interim between the rate now and the fixed rate in the future, then the value of the derivative does too. This will subsequently impact the performance the investor receives either positively or negatively.

Futures-based currency ETCs are complex investments, and most are generally only suitable for knowledgeable investors.

What is the annual charge on an ETC?

Most ETCs quote an ongoing annual charge figure. It’s important you read and review all important documents, including the KIID, of any investment you’re considering. You can find these via the HL website on the factsheet of each ETC.

You’ll pay an annual charge for holding ETCs with HL. Charges on this vary depending on the account the ETC is held in. Find more information on this, and other potential charges, on our charges page.

In addition to the risks associated by all ETPs, which can be viewed here, ETCs also encounter:

Index sampling risk – if the ETC uses an index sampling technique where it invests in a representative sample of shares or bonds that represent the index, there is the risk that the securities selected may not match the performance of the total index.

Counterparty risk – this occurs when a third party is involved with some aspect of running the ETC. For example, when ETCs use derivatives such as futures or options or when they are lending stock as part of a securities lending programme. If the counterparty (the third party) ran into financial difficulties, there is a chance that the ETC and subsequently the investor could lose money. This could involve larger costs to the ETC, the ETC could cease trading temporarily or, in the worst-case scenario, be wound up altogether.

Investors should understand the specific risks of an ETP before they invest, please see the KIID for full details.

What is the difference between an ETC and a commodity ETF?

ETCs should not be confused with commodity ETFs, which invest directly in and hold physical commodities, such as agricultural goods, natural resources, and precious metals. The ETC doesn't buy or sell the commodity or futures contract directly. That note is collateralised by physical commodities, which are bought using the cash from inflows into the ETC.