What you will learn
- Compare physical, futures, fund and producer-share exposures.
- Calculate margin leverage and fund tracking drag.
Four ways to hold exposure
Holding the physical commodity involves storage, insurance and quality checks, and suits only some commodities. Futures give exposure through standardized contracts. Exchange-traded funds package physical holdings or futures positions into a share.
Producer shares are a fourth route but do not track the commodity cleanly. Company results also depend on costs, debt, management, taxes and the stock market, so the share price can move differently from the commodity.
Futures margin and leverage
A futures position requires initial margin, a deposit that is a fraction of the contract's notional value. Gains and losses are settled daily, and if equity falls below the maintenance level the holder must add funds or face closure.
Notional value is price × contract size × number of contracts. Dividing notional value by margin gives leverage, and profit or loss applies to the whole notional amount, not just the deposit.
Funds, roll drag and tracking
A fund holding physical metal pays storage and insurance costs through its expense ratio. A futures-based fund must roll contracts, so it also bears the roll effect, which can be large in contango.
Tracking difference is the gap between a fund's return and the commodity's spot return, reflecting fees, roll yield, collateral income and timing. Read the product documents to learn what a fund holds and what it is designed to track.
Worked example: Margin on a fictional futures contract
A fictional contract covers 5,000 units at 6.00, so notional value is 5,000 × 6.00 = 30,000. With initial margin of 1,500, leverage is 30,000 ÷ 1,500 = 20 times. A 3% fall to 5.82 loses 5,000 × 0.18 = 900, which is 60% of the margin. If maintenance margin is 1,100, remaining equity of 600 triggers a margin call of at least 900.
Check your understanding
A futures-based fund has an expense ratio of 0.80% and roll drag of 2.0% a year. If spot rises 5.0% over the year, what are its approximate return and tracking difference, ignoring collateral income and taxes?
Show answer and explanation
Approximate return is 5.0 - 2.0 - 0.8 = 2.2%. Tracking difference against spot is 2.2 - 5.0 = -2.8 percentage points. A physically backed fund has no roll drag but still pays storage and fees, and collateral income in a futures fund would offset some costs.