Investing in ETCs: what is it and how do you do it?

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Investing in ETCs can be a simple way to gain exposure to commodities such as gold, oil and other goods, without having to physically own them. But what is an ETC exactly? And how can you invest in them? In this article, you will discover everything about ETCs and how you can start investing with BUX today.

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What is an Exchange Traded Commodity (ETC)?

An Exchange Traded Commodity (ETC) is an investment product that tracks the price of one or more commodities, such as gold, silver or oil. This allows you to invest in various commodities without physically owning them. The value of the ETC changes along with the price fluctuations of the specific commodities in which you have invested. It is important to know that an ETC is a debt instrument, which means you are lending money to a company instead of becoming a co-owner. An ETC is essentially a bond loan from the ETC provider.

How does an ETC work?

An ETC tracks the price of a commodity or a combination of them as accurately as possible. The value of the ETC therefore rises or falls with the value of the commodities invested in. For example, if you invest in a gold ETC, this ETC follows the gold price on the exchange.

You buy and sell an ETC just like a stock, via an investment platform or broker like BUX. This allows you to invest in oil or gold with a small amount without having a shed full of goods. The price changes throughout the day, depending on the commodity.

Different types of Exchange Traded Commodities

Not every ETC works in the same way. The differences lie mainly in how the commodity is tracked. Broadly speaking, there are two types of ETCs, each with its own application: physical and synthetic ETCs.

1. Physical ETCs

With a physical ETC, the issuer actually owns the commodity. This is mainly seen with precious metals such as gold, silver and platinum. For every ETC issued, a quantity of the metal is stored in a secure vault. This results in little ‘paperwork risk’.

2. Synthetic ETCs

Synthetic ETCs track the price of a commodity via financial contracts (futures). This construction is used for commodities that are not practical to store physically, such as oil, natural gas or wheat.

The pros and cons of investing in ETCs

ETCs can be a smart way to invest. However, there are also points of attention to consider. Let’s take a look at these via the table below.

The pros and cons of ETCs

The difference between ETCs, ETFs, ETNs and ETPs

In addition to ETCs, there are also the terms ETFs, ETNs and ETPs. But what exactly is the difference?

• ETC: An Exchange Traded Commodity is an investment product that tracks the price of one or more commodities, such as gold, silver or oil.
• ETF: An Exchange Traded Fund is a fund that is traded on the exchange. Instead of investing in a single stock, with an ETF you immediately invest in dozens or even hundreds of different stocks.
• ETN: An Exchange Traded Note is a debt instrument that tracks the price of an investment product or index. You are essentially lending money to the issuer of the ETN.
• ETP: An Exchange Traded Product is a collective name for all exchange-traded products, which include ETFs, ETCs and ETNs. Read more here: Invest in Exchange-Traded Products (ETPs).

What are the risks of investing in ETCs?

Investing in ETCs can be a valuable addition to your portfolio, but it is good to understand the risks. These include issuer risk, price volatility, currency risk and no income stream.

• Issuer risk: If the institution issuing the ETC goes bankrupt, you are a creditor. You run the risk of losing (part of) your investment.
• Price volatility: The value of an ETC moves with the price of the underlying commodity, which can fluctuate due to geopolitical tensions or weather conditions.
• Currency risk: Many commodities are traded in US dollars. If you invest in euros, exchange rate fluctuations can affect your return.
• No income stream: ETCs do not pay dividends or interest. Your return comes entirely from price development.

How can you use an ETC in an investment portfolio?

ETCs are often used as a supplement alongside stocks and bonds. Although ETCs themselves are usually not diversified, they can help to spread risks and diversify your portfolio. See it as part of a broader strategy, not as the only investment.

Is it wise to invest in ETCs?

Whether investing in ETCs is wise depends on your personal situation. Do you have a long horizon, sufficient knowledge and do you understand the risks? Then an ETC can be a valuable addition. An ETC is a relatively complex financial instrument. We recommend that you gain knowledge about ETCs before investing. Read sections 4 and 5 of our risk disclosure and the Key Information Document (KID) carefully. These sections explain the risks of ETPs in detail.

Investing in ETCs: how can you buy ETCs?

You can buy an ETC via a broker, such as BUX. With us, you will find a diverse range of ETCs, such as WisdomTree Physical Platinum, Xetra Gold and WisdomTree Natural Gas.

If you prefer a hands-off approach, the BUX Investment Plan might be for you. Via our user-friendly platform, the BUX app, you can easily set up your investment plan and choose the amount you want to invest each month, starting from €10.

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Investing involves risks. You can lose your investment.

All views, opinions and analyses in this article should not be interpreted as personal investment advice. Individual investors should make their own decisions or seek independent advice. This article has been prepared for informational purposes and should be considered marketing communication.