Commodity ETFs or Futures?


Andy Waldock Image Andy Waldock Founder, Commodity & Derivative Advisors

Commodity trader Andy Waldock discusses the divergences between investing in commodity ETFs as opposed to buying futures.

Trading commodities versus trading commodity ETFs. We’re here with Andy Waldock, who is going to tell us how they differ from one another and what advantages and disadvantages they both have.

Well, the primary difference and the major capital advantage to trading commodities versus the ETFs is the difference between margin money versus full face value.

When you trade an ETF, if you want to buy $10,000 worth of GLD, you have to put up the full $10,000. Whereas, if you want to control 1,000 ounces of gold, you only have to put the margin money for that. Typically it’s around 10% of contract value, so that allows you to allocate the other 90% of your overall fund into other interest-earning resources. Or just have free cash available for whatever you may need it for.

The second major difference are the reporting characteristics between the ETFs and the futures. If you look through the ETFs, you can find out who the underwriters are and who the primary holders are of those ETFs, and what their purposes are and their expense ratios.

In the commodity futures market, we use a report called the Commitments of Traders Report. It comes out weekly. It’s published by the Commodities Futures Trading Commission. What it provides to us are the net changes of the producers and end-line consumers of those commodities.

It’s always been my belief coming from three generations of hog farming and commodity trading and brokerage that the suppliers or the end users are the ones who understand the true values of their markets.