Exchange-traded commodity

A listed product giving exposure to a commodity and traded like a share. It may hold the physical good, an unallocated claim on it, or futures contracts.

Example

Over one flat year a physically backed product charging 0.40% returned about -0.40%, while a futures-based one charging 0.75% returned about -6.12% because of the roll.

Important

Its name says what it tracks, never what it holds. The sentence in the documentation saying what it holds is the one that determines your return.

Related terms

• Roll yield — The gain or loss a futures holder takes each time an expiring contract is replaced with a later one, as the expiring contract converges to the spot price.
• Allocated storage — An arrangement in which specific, identified bars are recorded as belonging to you, as opposed to an unallocated claim on a shared pool of metal.
• Tracking error — How much a fund's gap to its index varies over time - the consistency of the shortfall, not its size.
• Futures contract — An exchange-traded agreement to take or make delivery of a stated quantity of a good on a stated future date, held on a deposit far smaller than the notional amount.

Lessons that explain it

• A physical good, and three very different ways to own it — Metal in a vault, a listed product that holds metal, and a dated contract on metal are not three versions of one investment. They differ in minimum size, cost, storage and who owes you what. (9 min)
• The curve, and why a fund can lag the price it tracks — Spot is set by physical supply and demand. Everything dated is set by the cost of carrying the good to that date - and when the curve slopes upward, a fund that holds contracts loses money every time it rolls, even with the price standing perfectly still. (12 min)
• Appraising one exposure: the drivers, the carry and what the product holds — Six checks. Two of them - the curve and what the product actually holds - decide more of a five-year outcome than any view about supply and demand, and both have exact published answers. (13 min)

All 578 terms in the Investing glossary