ETCs are relatively new products that allow investors to gain exposure to commodity prices without trading futures or taking physical delivery of the commodities. ETF Securities listed the world’s first ETC in Australia and London four years ago and recently added a range of oil-based ETCs based on the forward price of oil over one, two and three years.
The latest additions to the range allow investors to benefit from backwardation across a range of commodities futures. Backwardation refers to the price of a commodity for future delivery being lower than the current market price, or a future delivery price being lower at a further delivery date than a nearer delivery date.
The reverse of backwardation is contango. This is where the price of a commodity for future delivery is higher than the current market price, or the future delivery price is higher at a further delivery date than a nearer delivery date. The rate of backwardation and contango will fluctuate, so investors can use the different maturity dates of the ETC range to their advantage.
ETF Securities says demand from investors for more choice in different parts of the commodity futures curve has led to the creation these new forward ETCs. More choice allows investors greater flexibility in asset allocation to commodities, but interest is likely to be from sophisticated investors who can grasp the concepts of backwardatio