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. The company listed two existing exchange-traded commodities – ETFS Brent Oil and ETFS WTI Oil – on the LSE in 2005 and 2006 respectively.
The new range of six products will track December Nymex WTI oil contracts and December Ice Futures Brent oil contracts with an average maturity of one, two or three years.
According to ETF Securities, investors are looking for access to different parts of the oil futures curve – the term used to describe the forward price of oil from the present to several years ahead. It says demand for ETCs has been driven by investor interest in commodities and increased knowledge about commodities investing.
Through the ETCs, investors can benefit from backwardation. This 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.
The ETCs open up the oil futures market to investors who do not want to, or cannot invest directly. However, due to the complex nature of this market, they are likely to appeal mainly to sophisticated investors and multi-managers.