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FAQs for ETCs
- Who is ETF Securities (ETFS)?
- What are Exchange Traded Commodities (ETCs)?
- Are ETCs very similar to Exchange Traded Funds (ETFs)?
- How do I buy and sell an ETC?
- Who is the Issuer?
- How are ETCs priced and where is the information published?
- Who calculates the underlying DJ-UBSCISM commodity indices, and where is the information published?
- Do ETCs track the underlying commodity price?
- Do ETCs make interest or dividend payments to investors?
- Why are some ETCs priced off futures and some priced directly off physical metals?
- How can you guarantee the tracking error remains minimal?
- How is liquidity provided?
- What would happen if ETF Securities were to go bankrupt?
- What is the credit risk of the different ETCs?
- Are there any other costs besides Management Fees?
- My broker indicated she/he cannot buy the product because it is in USD. What can I do?
- Can investors lose money?
- What is the difference between ETCs and certificates or turbos?
- If I invest in ETCs, is my investment covered by the Financial Services Compensation Scheme?
- Who regulates ETF Securities and ETCs?
- Can I take physical delivery of the metal backing physical metals products upon redemption?
- Has the cessation of the Lyxor marketing agreement had any impact to the structure of Gold Bullion Securities?
- Who audits the metal bars for physically-backed precious metal ETCs?
FAQs for ETCs
1. Who is ETF Securities (ETFS)?
ETF Securities is a provider of Exchange Traded Products (ETFs, Commodity ETCs and Currency ETCs). The management of ETF Securities pioneered the development of ETCs, with the world's first listing of an ETC, Gold Bullion Securities in Australia and London in 2003 and then the world's first entire ETC platform which was listed on the London Stock Exchange in September 2006.
ETF Securities now offers more than 270 Exchange Traded Products (ETPs). The ETPs provide investors with a wide variety of investment strategies, with ETPs offering access to asset classes such as equities, currencies and commodities with physical, long, forward, leveraged and short exposure.
ETPs are simple to access as they are traded in up to five currencies (EUR, USD, GBP, JPY and AUD) and listed on up to nine major exchanges globally including the London Stock Exchange, the New York Stock Exchange, the Tokyo Stock Exchange, NYSE-Euronext Paris, NYSE-Euronext Amsterdam, Deutsche Börse, Borsa Italiana, the Australian Securities Exchange and the Irish Stock Exchange.
2. What are Exchange Traded Commodities (ETCs)?
ETCs are simple and transparent open-ended securities which trade on regulated exchanges. ETCs enable investors to gain exposure to commodities without trading futures or taking physical delivery. ETFS-branded ETCs are secured, undated, limited recourse debt securities that are designed to track underlying commodities or commodity indices.
3. Are ETCs very similar to Exchange Traded Funds (ETFs)?
ETCs are very similar to ETFs because they are both open-ended, continuously traded and have multiple market makers. The main difference is that ETCs use a secured, undated, limited recourse debt securitiy structure, whereas ETFs typically use a fund structure.
4. How do I buy and sell an ETC?
Investors can buy and sell ETCs throughout the trading day on regulated stock exchanges through ordinary brokerage accounts.
5. Who is the Issuer?
ETF Securities’ ETC issuers are special purpose vehicles (SPVs) created to issue ETCs: ETFS Oil Securities Limited is the Issuer for 9 Oil Securities, ETFS Commodity Securities Limited is the Issuer for over 100 commodity ETCs, ETFS Metal Securities Limited is the issuer of 5 physically backed precious metal ETCs ,Gold Bullion Securities is the issuer of 1 physically backed gold ETC and ETFS Industrial Metal Securities Limited is the issuer of 4 physically backed industrial metal ETCs. The assets of each Issuer and class of security are ring-fenced for investor protection. The Issuers are administered by ETFS Management Company (Jersey) Limited.
6. How are ETCs priced and where is the information published?
All ETCs are priced using a fixed pricing formula which each use a reference price relating to the relevant underlying commodity or commodity index: The specific pricing formulae are set out in the prospectus(es) of each Issuer.
ETFS Oil Securities are priced directly off the closing settlement price of the relevant oil or carbon emissions allowance futures as published by the relevant futures exchange.
ETFS Commodity Securities are priced using the closing price of the DJ-UBS Commodity IndexSM sub-indices and published by CME Indexes;
ETFS Metal Securities are priced using the PM Fixing spot price of the four relevant precious metals as published by the LMBA (in the case of gold and silver) or LPPM (in the case of platinum and palladium).
Gold Bullion Securities are priced using the PM ficing spot price of gold
ETFS Industrial Metal Securities are priced using the LME cash settlement price of the relevant industrial metal.
7. Who calculates the underlying DJ-UBSCISM commodity indices, and where is the information published?
CME Indexes (formerly Dow Jones) and UBS calculate the DJ-UBS Commodity IndexSM and sub-indices each trading day based on the relevant closing/settlement price(s) published by CME Indexes (at www.djindexes.com) and distributed through many data distributors, including Bloomberg and Reuters.
8. Do ETCs track the underlying commodity price?
ETCs which track commodity futures prices are almost 100% correlated (before fees and expenses) with the underlying futures price, however the spot price return is not an investable return. The ETCs are designed to earn a return similar to that which could be earned from investing in the underlying commodity futures markets.
ETCs (other than those with a short or leveraged element) which track commodity futures indices are almost 100% correlated (before fees and expenses) with the settlement price of the underlying futures index, however the spot price return is not an investable return. The ETCs are designed to earn a return similar to that which could be earned from investing in the underlying commodity futures index.
ETCs which are physically backed are priced directly off the metal spot price and therefore returns are 100% correlated (before fees and expenses) to the underlying price.
9. Do ETCs make interest or dividend payments to investors?
No interest or dividend payments are made to investors.
10. Why are some ETCs priced off futures and some priced directly off physical metals?
Some ETCs (ETFS Oil Securities and ETFS Commodity Securities) are priced off futures as it is not possible to store - for long periods - some physical commodities. In addition, futures pricing can be more liquid and efficient for some commodities, especially where the futures contract helps to standardize the pricing - for example, agricultural commodities where quality can vary between crops, seasons and regions. In the case of the physical precious metals ETCs, precious metals are homogenous, can be stored easily and do not decay, and therefore can be priced directly off the underlying physical commodity.
11. How can you guarantee the tracking error remains minimal?
Similar to ETFs, ETCs are open-ended securities, and therefore Authorised Participants (who are generally investment banks with commodities expertise) can create or redeem ETCs at their underlying value or NAV. Tracking error is also reduced by using fixed pricing formulae which use the price of the underlying as a reference.
12. How is liquidity provided?
ETCs are open-ended, therefore new ETCs can be created by Authorised Participants according to demand. The liquidity of ETCs is generally only impacted by the liquidity of the relevant underlying commodity market(s).
13. What would happen if ETF Securities were to go bankrupt?
In the event that ETF Securities were to go bankrupt, there should be no impact on the assets of the Issuer as these are ring-fenced from the assets of ETF Securities and are held by the Issuer for the benefit of security holders.
14. What is the credit risk of the different ETCs?
Please refer to the Counterparty Risks Educational documents to get an understanding of the credit risk.
15. Are there any other costs besides Management Fees?
As well as any normal transaction costs which your broker or financial advisor will charge you, the following are the costs additional to the Management Fee associated with the ETCs:
ETFS Metal Securities: None
ETFS Classic Commodity Securities:
- Swap Spread: 45 bps
- Licence Allowance: 5 bps
ETFS Forward Commodity Securities:
- Swap Spread: 60 bps
- Licence Allowance: 5 bps
ETFS Short Commodity Securities:
- Swap Spread: 85 bps
- Licence Allowance: 5 bps
ETFS Leveraged Commodity Securities:
- Swap Spread: 130 bps
- Licence Allowance: 5 bps
ETFS Industrial Securities:
- Annual Rental Fee: differs per metal but ranges between 55 bps and 650 bps (as at 18-May-11)
- Insurance Allowance: 12 bps
16. My broker indicated she/he cannot buy the product because it is in USD. What can I do?
Your broker or financial advisor should be able to buy or sell ETCs as they are listed on regulated exchanges. Most brokers should be able to convert a USD amount to another currency.
17. Can investors lose money?
The price of ETCs can go up or down, however investors cannot lose more than the amount of the initial investment.
18. What is the difference between ETCs and certificates or turbos?
ETCs are open-ended securities backed by either physical precious or industrial metals or swaps with major financial institutions who are leaders in the respective field, and multiple market makers ensure tight bid-offer spreads for trading on regulated exchanges. Certificates or turbos are notes created, priced and traded by issuing banks(often with no formal exposure to the underlying reference asset) - there are no creations/redemptions on demand and they are generally less liquid.
19. If I invest in ETCs, is my investment covered by the Financial Services Compensation Scheme?
The FSCS applies to financial advice and investment firms and not products. ETFs and ETCs are therefore not directly covered by the FSCS.
20. Who regulates ETF Securities and ETCs
The prospectus(es) of each ETC issuer is approved by the UK Financial Services Authority in its capacity as UK Listing Authority.
The issuers and their manager (ETFS Management Company (Jersey) Limited) are regulated by the Jersey Financial Services Commission.
By virtue of the listing of the ETCs on the Official List of the UK Listing Authority and their admission to trading on the London Stock Exchange, the issuers are subject to the UK Listing Rules, Prospectus Rules and Disclosure and Transparency Rules of the UK Financial Services Authority as well as the Admission Standards of the London Stock Exchange.
21. Can I take physical delivery of the metal backing physical metals products upon redemption?
All physical metals products can be redeemed by delivery of the underlying metal - in the form of bullion in the case of the precious metals products and in the form of LME Warrants in the case of the industrial metals products . The rights to physical redemption belong to both Investors and Authorised Participants for ETCs issued by Gold Bullion Securities Limited and just to Authorised Participant for ETCs issued by ETFS Metal Securities Limited and ETFS Industrial Metal Securities. Please refer to the relevant prospectus for more information.
22. Has the cessation of the Lyxor marketing agreement had any impact to the structure of Gold Bullion Securities?
Lyxor were marketing agent for Gold Bullion Securities. Lyxor had no ownership rights to the company. All operations and management of the Issuer and ETC stays the same without any impact on the Issuer and ETC.
23. Who audits the metal bars for physically-backed precious metal ETCs?
The metal bar audit is done twice a year by Inspectorate International, the world leader in commodity inspection and testing. Inspectorate International is a global company providing inspection, testing, and analysis of commodities worldwide, such as metals and minerals. For more information visit: www.inspectorate.com
To view the latest audited bar count for physically backed products, please click here.
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