WHAT IS AN ETC AND HOW DOES IT WORK?
Exchange Traded Commodities (ETCs) are an alternative for investors wanting exposure to commodities without having to own the actual commodities themselves. Investors can typically gain exposure to individual commodities or a basket of goods through an index related ETC.
HOW CAN I TRADE IN ETCs?
Under the current regulations and the rules of the Financial Conduct Authority (FCA), we are required to satisfy ourselves that you have the experience and knowledge to enable you to understand the risk involved when dealing in ‘complex instruments’ such as some ETCs. Therefore, before you can trade in ETCs you must undertake an assessment to demonstrate your knowledge and understanding of complex instruments, and this will involve completing our Complex Instruments: Appropriateness Assessment Form.
THE BENEFITS OF ETCs
The annual management charges on ETCs are usually low, and most are ISA and SIPP eligible. Furthermore, there is no Stamp Duty to pay on shares purchased within many ETCs. ETCs are open-ended securities with the price largely affected by change in the spot commodity price. By adding different asset types to your portfolio (i.e. diversification) such as ETCs, the risk is spread so a move downwards in one asset may be offset by a move upwards in another.
THE RISKS OF ETCs
Geopolitics and macroeconomics can add volatility to commodity markets, as seen with the price of oil, for example. ETCs are classified as a high-risk investment and are subject to counterparty risk.
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