Investing in raw materials was reserved only for traders through future contracts and forwards that had the time and ability to operate actively. This is how raw materials operate more purely in financial markets. (as well as currencies, shareholders' indices and interest rate contracts and other underlying assets).
But the ETFs revolutionized the way to include them in their wallets with relative ease. Commodity ETFs are a category that has quickly become the most popular way to invest in this kind of volatile assets for retail investors, that in the past had been out of the reach of many investors.
There are many ETFs that replicate a broadly diverse raw material basket, but there are also ETFs that replicate subsectors or raw material subdices, and several products in particular of each product.
The investment can be linear, i.e. without leverage or leverage, but there is also the possibility of investing in worded and/or inverse products. The U.S. concentrates the operatory, but there is also in Canada, Britain and other strong squares for this asset class.
What are ETFs
ETFs are listed investment funds, i.e. that are assets without legal personality that allow to channel the investments of many investors. It is necessary, regardless of the use of derivatives or any other coverage or directional mechanism in the terms provided by the law, of an asset or assets in which to invest the contributions of customers.
What is an ETN
Not everyone is ETF, but there are also the so-called ETN. The ETNs, on the contrary, were designed as an unsecured passive, so it is a DEUDA. A liability of the institution which issues and, like all debt, has a risk of counterpart. This is the main defect they have, because we must thoroughly analyze who issues it, who is the one who guarantees it.
This is why issuers often offer protection measures (more or less effective) through collateral or insurance contracts provided by third parties.
They serve to reduce the risk of counterparty. The more contingencies they cover or the better they are, the less the risk of buying an ETF for the investor. They are standardized products, listed in the scholarships, and have all the benefits that have ordinary actions in terms of liquidity, simplification in purchase/sale and access to the retail investor. Often these ETFs create an artificial demand for an underlying as it responds to a financial need and not to a real interest, inflating their prices artificially.
The ETN, on the contrary, does not require a direct investment in the underlying, but only replicate the behavior of the same through the chosen derivative instrument. Therefore, the ability to influence the market is much smaller. Another great advantage of ETN is the lowest tracking-error
Since it replicates to the index and not its components, it is therefore not impaired by the adjustment processes that the index suffers. The ETN have a specific redemption date, although the issuing bank may allow early redemption of the notes. The main thing to note is that the ETN have a risk of non-compliance, like any other debt instrument.
Relevant raw material indices
The CRB Index prepared by Reuters/Jefferies and which is very followed by investors and analysts to know how the global commodity sector is. It is the most relevant industry index, although there are other relevant indices, which differ by their exposure to a particular subsector or another.
The ETN are a wider figure in which it can be invested not only in raw materials, but in other types of instruments. There are three particular types of ETN: Exchange-traded certificates, Exchange-traded currencies and Exchange-traded commodities (ETC). The latter are very specific and differ from the ETN because they are only of raw materials.
The POWERSHARES DB COMMODITY INDEX TRACKING FUND (DBC) is in the Top 100 of all the more liquid ETFs. Tracks the raw materials index issued by Deutsche Bank.
The other indices of relevance, but with lower liquidity, are the IPATH DOW JONES-UBS COMMDTY (DJP), the ELEMENTS ROGERS TOTAL RETURN (RJI) and the ISHARES S&P GSCI COMMODITY INDEX (GSG). Those who follow them have a smaller liquidity, however well-ranked in the table because the volumes are nominal and depend on the nominal ETF price. These three ETFs track the respective general commodity indexes of the agency Dow Jones and UBS, on the one hand, Rogers, and Standard & Poor's and Goldmans Sachs on the other.
Among the most popular particular commodity ETFs we can mention the SPDR Gold Trust (GLD) or the COMEX Gold Trust (IAU) for gold, the iShares Silver Trust (SLV) for silver, the United States Oil Fund (USO) for oil, and the United States Natural Gas Fund (UNG) for natural gas, among others.
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