NASAA Series 65, Uniform Investment Adviser Law ExaminationInvestment Vehicle CharacteristicsMedium
A client is looking to invest in a security that offers exposure to the price movements of a specific commodity, such as gold or crude oil, without directly owning the physical asset or trading futures contracts. They desire a product that trades on an exchange like a stock. Which of the following investment vehicles would be most appropriate?
- ACommodity Futures Mutual Fund
- BCommodity Pool Operator (CPO)
- CExchange-Traded Commodity (ETC)
- DPhysical Commodity ETF
Show answer & explanationAnswer & explanation
Correct answer: C. Exchange-Traded Commodity (ETC)
An Exchange-Traded Commodity (ETC) is designed to track the performance of a single commodity, trades on an exchange, and avoids direct ownership or futures trading, fitting the client's needs.
Why the other options are wrong
- A. A Commodity Futures Mutual Fund invests in futures, which the client wants to avoid directly, and is not designed for single commodity exposure.
- B. A Commodity Pool Operator (CPO) manages pooled funds for commodity futures trading, which the client wants to avoid and is not an exchange-traded product.
- D. While some ETFs hold physical commodities, the broader and more precise term for a product tracking a single commodity and trading on an exchange without direct ownership is an ETC, which can track an index or a single commodity via derivatives.
Exchange-Traded Commodity (ETC)
An investment product that tracks the performance of a single commodity or a commodity index, trading on an exchange like a stock.
- Tracks a specific commodity (e.g., gold, oil)
- Trades on stock exchanges
- Does not require direct ownership of physical assets
Memory trick: ETC: Easy Trade for Commodities.