Which type of commodity ETF is most suitable for an investor seeking to gain exposure to the spot price of a commodity?

Commodity Exchange-Traded Funds (ETFs) provide investors with exposure to commodities such as

gold, oil, and agricultural products. The most suitable type of commodity ETF for gaining exposure to

the spot price of a commodity is the Physical-based ETF because it involves direct ownership or

storage of the commodity. For instance, gold ETFs backed by physical gold store bullion in vaults.

1. Physical-based ETFs

These ETFs hold the actual commodity in physical form, which ensures a close tracking of the spot

price. Physical gold ETFs, for example, store gold bars and adjust the NAV (Net Asset Value) based on

the current spot price. This eliminates discrepancies caused by futures contracts or swaps, making

them ideal for tracking spot prices.

2. Swap-based ETFs

These rely on derivative agreements (swaps) to replicate the price movements of a commodity.

While cost-effective, they do not hold the actual commodity, and their performance may slightly

deviate from the spot price due to tracking errors or counterparty risks.

3. Futures-based ETFs

These use futures contracts to gain exposure. However, futures contracts come with complexities

such as contango and backwardation, which can cause performance differences from the spot price

over time.

4. Equity-based ETFs

These invest in shares of companies involved in the commodity sector (e.g., mining or energy

companies). Their performance is influenced by company-specific factors and broader equity market

trends, making them unsuitable for tracking spot prices.

Reference from CSC Study Documents:

Exchange-Traded Funds, Chapter 19, Volume 2: Discusses the characteristics and structure of ETFs,

including commodity-based ETFs and their classification​.

Risks related to tracking error and direct ownership of assets are highlighted under ETF types in

Section 19​.