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Exchange Traded Commodities (ETCs) - London Stock Exchange

 
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schong719
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Joined: 17 Jul 2006
Posts: 115

PostPosted: Sat Sep 30, 2006 7:43 am    Post subject: Exchange Traded Commodities (ETCs) - London Stock Exchange Reply with quote

London Stock Exchange (LSE) creates new sector, Exchange Traded Commodities. The new trading platform on the LSE will deal exclusively in Exchange Traded Commodities (ETCs), with the management of ETF Securities having created all 32 securities (29 new ones and 3 existing ones).

This is largest-ever simultaneous listing on the LSE and will enable ordinary investors, for the first time, to trade such an expansive range of commodities through ordinary brokerage accounts just like any equity. The new securities will also be the first listed products to track a series of sub-indices representing individual commodities, along with commodity groups, that have recently been added to the Dow Jones-AIG Commodity Index family.

Similar to Exchange Traded Funds, ETCs are liquid, accessible and simple. ETCs can be created and redeemed on a continuous basis by market makers, matching the liquidity of the underlying markets. ETCs are open-ended securities which can be bought and sold intraday by investors on a regulated exchange in the same way as any equity. They provide accurate and transparent commodity exposure to recognised benchmarks in a single trade. In addition, ETCs require no trading or management of futures contracts as ETCs are simply priced off new commodity indices published by Dow Jones Indexes.

Investors can buy and sell the new ETCs through regulated brokers or approved market makers. ETCs can be traded with all the same order types available to equities, including market, limit and stop orders. They can also be shorted through stock borrowing or CFDs. The minimum trade size is one security and settlement is T+3 (trade date plus three business days) in CREST.

Commenting on the launch of the ETCs, Graham Tuckwell, Chairman of ETF Securities, said:

"We designed ETCs to be simple and secure, open-ended securities. They have lowered many of the barriers that previously prevented some investors from investing in commodities including access, trading and operational risks, custody, and transaction costs. ETCs also provide a pure way of tracking a commodity rather than trying to replicate exposure by trading shares of commodity companies - many of which do not correlate to the underlying commodity, if available at all.

"ETCs do not involve any of the difficulties with buying and then managing a futures position - such as worrying about margin calls, contracts expiring and rolling positions - or in buying and storing physical commodities. The new securities track indices created by Dow Jones Indexes and AIG and each individual commodity index tracks a designated futures contract and is designed to reflect the returns from investing in commodities."

Fuller's View - The addition of these indices to the investment universe is to be welcomed as they make the commodity markets much more accessible. It is unfortunate that these vehicles have become available in the middle of a medium-term correction for many of their subjects but I'm sure they will be a strong source of demand once the secular uptrend reasserts itself. However there are a number of separate issues relating to dealing in these types of securities.

The first is that they do not actually track the commodity price. They follow the total return indices which aim to follow the futures price. These indices take into account three factors: the price, whether the commodity is in backwardation or contango and interest rates.

The price trend is obviously the most important factor when considering purchasing a commodity, however whether that commodity is in a backwardation or contango will exert a strong influence on the investor's ability to run the position over the long-term. The Dow Jones-AIG total return indices integrate the premium or discount of the futures roll into the price. This means that the copper index looks very much like the copper price and even outperforms the commodity price because of the backwardation. On the other hand the wheat index, which is contango does not track the actual wheat price because the cost of carry acts against the index.

When talking to ETF Securities this morning, they explained that these vehicles will also pay an interest rate. The reason for this is because when an investor takes out a futures position they do so on margin but when they buy an ETC they pay the full price. This means that because the fund is trading on margin but the client is not, they recompense the investor by paying an interest rate similar to a deposit.

These factors make the cost of trading in commodities much more obvious but it also means that one should be sure to look at both the commodity contract and the index to make sure that not only the trend, but the backwardation or contango is in one's favour.
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Casual72



Joined: 15 Dec 2006
Posts: 2
Location: New York

PostPosted: Fri Dec 15, 2006 8:32 pm    Post subject: Exchange Traded Commodities on the LSE Reply with quote

Has this happened? How can I do this? How can I trade commodities like and individual stock?

I have long maintained that the Commodity Indexes (CRB Reuters Index, Goldman Sachs Commodities Index) should be spun into an ETF so that the small individual investor could trade a basket of commodities much like we can own all 500 S&P 500 companies in one share of the S&P Spiders ETF.

I would certainly be an investor/holder in commodities if I could as I believe in the long term commodity bull market, particularly in agriculture.

I believe the move to convert corn to ethanol for fuel is a huge mistake and WILL backfire. Renewable sources should be used for fuel. There is a man who converted a toyota hybrid vehicle by adding additional battery packs in the trunk and plugging in the car to charges these batteries. This man achieved 200 miles per gallon (this can be googled: subject 200 miles per gallon). It would seem all that needs to be done is add solar cells to the roof, hood and trunk to charge the batteries to eliminate the plug in part and the 200 mpg vehicle should be achievable. (particularly with the latest advances in solar technology).

ANYWAY using food stocks for fuel is a BIG mistake.
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Casual72



Joined: 15 Dec 2006
Posts: 2
Location: New York

PostPosted: Fri Dec 15, 2006 8:34 pm    Post subject: Reply with quote

Schong you post many many many informative posts. Thank you.
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