More on ETCs

What are Exchange Traded Commodities?

ETCs are open-ended securities that are traded on regulated exchanges. ETCs enable traders gain exposure to commodities without trading futures or taking physical delivery. ETCs are undated, zero coupon notes that aim to track the underlying commodity index or individual commodity. ETCs thus combine features in Contracts for Differences and transferrable securities. (source: ETF securities and UK FSA).

ETCs are similar to ETFs because they are both open-ended, continuously traded and have multiple market makers. The main difference between ETCs and Exchange Traded Funds (ETFs) is that ETCs use an undated, zero coupon note structure, whereas ETFs typically use a fund structure.

The ETF Securities group owns/manages four issuing companies which issue the ETC securities that Saxo Bank offers. These are traded on the London Stock Exchange and various other exchanges throughout Europe, known as Exchange Traded Commodities (ETCs).

All of the ETCs and issuing companies are ring fenced, thus any credit issue with any ETC or issuing company will not affect the assets of any other ETC or issuing company. For example, if there are credit issues with Commodity Securities Ltd. then none of the other issuing companies, or ETCs issued by them are affected.

Overview of the Exchange Traded Commodities owned/managed by ETF Securities:

The way the ETC is linked to the underlying commodities depends on the exposure of ETC. ETCs come in five different types of exposure: Physical, Classic, Forward, Short and Leveraged.

• Physical ETCs: These are ETCs which are linked to the price of physical precious metals.
• Classic ETCs: These are the standard ETCs which are linked to an index based on near-month futures contracts.
• Forward ETCs: These are ETCs which are linked to an index based on forward-month futures contracts.
• Short ETCs: These are ETCs which are inversely linked to the underlying commodities index.
• Leveraged ETCs: These are ETCs which are double-leveraged on the underlying commodities index. The double leverage implies that the movements of the underlying commodity are amplified (doubled).

To illustrate:

If a physical gold ETC is purchased, then the ETC will provide a return equivalent to movements in the gold spot price less fees. If a leveraged crude oil ETC is bought, then the price of the ETC will change daily by a factor of 2 on the daily percentage change in the underlying crude oil index. In other words, if the price of crude oil increases by 50% then the leveraged crude oil ETC will increase by 100%. And vice versa, if the price of crude oil decreases by 50% then the leveraged crude oil ETC will lose 100% of its value.

What about liquidity?

Because ETCs are open-ended, new ETCs can be created according to demand. Therefore ETCs are just as liquid as the underlying commodities market – either the physical or futures market.

The liquidity of the ETCs is thus affected by the liquidity in the underlying commodities market, but also by the willingness of market participants to trade with each other. Such situations might arise if one or more participants reach their limit on how much credit they are willing to give their counterparts.

Risks

The following are risks that should be considered before investing in ETCs:

• Fluctuation of market prices in the underlying commodities
• The ability of the Issuing company to pay on redemption is dependent on the credit risk it is exposed to
• Futures exchanges can suffer from market disruption and suspension of trading
• Dependency on Authorized Participants to make a market in ETCs in order to minimise the tracking error towards the underlying commodities and to provide investors with liquidity
• Currency risk to the extent that the investor has a native currency other than that in which the underlying commodity is set.

Trading ETCs can be very speculative and may result in losses as well as profits. Trading ETCs entails a considerable risk factor and is therefore not suitable for every investor. Saxo Bank cannot take into account special investment goals, the financial situation or specific requirements of individual users. Hence, clients should carefully consider their financial situation and consult financial advisors as to the suitability of their situation prior to making any investment or entering into any transactions. It is critical that clients investigate the precise details of the product they are considering in before investing. For a further description of the risks involved, please read the prospectus.

Frequently Asked questions:

Please visit the site of ETF securities for a full FAQ on ETCs.

Disclaimer

Exchange Traded Commodities (ETCs) are securities, which are generally required to register for marketing and/or trading in the individual jurisdiction in which they are publicly offered. Other conditions may apply depending on the jurisdiction in which the client resides. Please be aware that Saxo Bank recommends that clients should only invest in an ETC if it is duly registered in their local jurisdiction. The order for purchase of an ETC is deemed as acknowledgement and confirmation hereof. Saxo Bank shall have no liability for any losses whatsoever, including but not limited to any averse tax implications, that might incur as a result of investing in any ETC not duly registered in a local jurisdiction.