Etfs, Etns and E-Commodities Commodity

ETFs, ETNs and e-Commodities

Commodity market

A commodity market can be defined as a physical or virtual market place where products traded are either raw or primary. Commodities are categorized into two; the hard commodities which include the natural resources have to be extracted and the soft commodities which are generally the agricultural products and livestock. A retail investor can invest into the commodity market by utilizing the various investment options available in the market.

There are several investment options available to different categories of investors whereby certain products are made available only to certain classes of investors. Some of the investment products in the commodity markets are accessible only by large institutional investors who buy in bulk and sell them to the retail or individual investors in the secondary markets. An investor may opt to venture into the commodity market by either purchasing the index funds or the exchange -- traded funds. For purposes of this paper, three investment options are discussed as follows;

Exchange Traded Funds (ETFs)

Exchange Traded Funds (ETFs) can be described as an investment fund which is traded on the stock exchange. The shares which are sold are portfolios that include stocks, bonds, commodities and other investments. They assume the features of stock trading and each ETF has a net asset value. The ETF shares are available only to large investors who buy them in bulk and are referred to as creation units. Large investors which are usually institutions split the shares and sell them to individual investors in a secondary market.

The individual investors do not buy them directly from the fund managers but from the institutions. The investors who want to sell their shares have the option of selling them in the secondary market or sell back the creation units to the investment companies (U.S. Securities and Exchange Commission, 2010).

Advantages

ETFs have several advantages to the investors; the investors who have invested in the ETF shares enjoy the diversification of an index fund, also included is the option to sell short and buy on margin and purchase as low as one share compared to the value one stock. An additional advantage is that ETFs have lower expenses when compared to the average mutual funds.

Exchange Traded Notes (ETNs)

Exchange Traded Notes (ETNs) on the other hand can be describes as the senior, unsecured and unsubordinated debt securities which are usually issued by an underwriting bank. The returns for ETN investors are pegged to certain bench marks where by the underwriting banks agree to pay the amount in the index less the investor fees upon maturity. Due to their unsecured nature, they are backed by the credit of the underlying banks.

Advantages

It however has several advantages. ETNs offer access to new markets and exposures whereby the markets which were once inaccessible to the various individual investors are now reachable. It also offers an element of tax efficiency for the investors whereby it is treated as a prepaid contract. ETNs also have minimal tracking errors which are associated with the ETFs which come about as a result of the diversification.

Disadvantages

ETNs returns are backed by the credit of the underwriting bank, should the bank go bankrupt, the investors may lose their investments. ETN is still a new concept and the markets have not fully opened up for the investment option which therefore might result into illiquidity.

E -- Commodities

The commodity market is accessible to retail investors as opposed to when it was only meant for a certain class of investors. The retail investors have the option to buy precious and base metals in small quantities and hold them in electronic form. The investors can buy, hold and liquidate the commodity or get converted into physical coins. The exchange offers seven commodities which are in electronic form; gold, zinc, silver, copper, lead, nickel and platinum.