What is a single commodity ETF?

An exchange traded fund that invests in a physical commodity like natural gas, oil, silver or gold. A single commodity ETF can hold that particular commodity in physical storage, or may invest in futures contracts.

Why would an investor want to hold a single commodity ETF in their portfolio?

It is a more efficient way to gain exposure to a specific commodity in an investment portfolio than investing in a commodity producing company. Investing in a commodity company could prove to be a poor proxy for the commodity and potentially expose you to the particular risks associated with that company.

Moreover, commodities tend to have a low correlation with global stock markets; not necessarily moving in the same direction or by the same magnitude as stocks. Adding commodities to your portfolio can potentially reduce its overall volatility.

Who should buy them?

An investor looking to hedge against inflation, or against certain currencies, as they can be a source of value during times of financial, economic and political uncertainty.

They can also appeal to an investor looking for additional diversification for their portfolio to offset stock market volatility. Commodities generally have low correlation with most global equities, meaning that they do not necessarily move in the same direction, or by the same magnitude as stocks.

How do they work?

Horizons single commodity ETFs are based on futures contracts. Futures contracts are rolled from their specified delivery month to a subsequent delivery month before contract maturity (when the holder of the contract would be required to accept or make delivery of a physical commodity)

What are the implications of contango and backwardation?

Contango is a condition in which the price of a futures contract is trading above the expected spot price at contract maturity, and the futures curve is upward sloping. In a contango environment, an investor who is in long futures may experience negative “roll yield” if the contract is rolled after the futures price moves downward to converge with the expected spot price (assuming an unchanged spot price at maturity). Even if the commodity appreciates, as predicted by the futures curve at the time of the investment, the investor holding long futures may experience a loss. Typically, investors would want to be in short futures if the futures curve is in contango, unless they expect the commodity to appreciate by more than what is priced into the futures curve.

Backwardation is the inverse condition of contango, in which the price of a futures contract is trading below the expected spot price at contract maturity, and the futures curve is downward sloping. In a backwardation environment, an investor who is in long futures may experience positive “roll yield” if the contract is rolled after the futures price rises to converge with the expected spot price (assuming an unchanged spot price at maturity). Even if the commodity declines, as predicted by the futures curve at the time of the investment, the investor holding long futures may experience no loss. Typically, investors would therefore want to be in long futures if the futures curve is in backwardation, unless they expect the commodity to decline by more than what is priced into the futures curve.

Futures Curve in Contango

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Futures Curve in Backwardation

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Canada's Largest Family of Single Commodity ETFs

Ticker ETF Name Management Fee (%)
HUG Horizons Gold ETF 0.65
HUZ Horizons Silver ETF 0.65
HUC Horizons Crude Oil ETF 0.75
HUN Horizons Natural Gas ETF 0.75
 

Horizons Single Commodity ETFs attributes

• Trade on the Toronto Stock Exchange from 9:30 a.m. to 4:00 p.m. EST
• Currency hedged to the Canadian dollar
• Intraday liquidity
• Tax efficient
• Management fee ranges from 0.65% to 0.75%

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Horizons ETFs is a Member of Mirae Asset Global Investments. Commissions, trailing commissions, management fees and expenses all may be associated with an investment in exchange traded products managed by Horizons ETFs Management (Canada) Inc. (the "Horizons Exchange Traded Products"). The Horizons Exchange Traded Products are not guaranteed, their values change frequently and past performance may not be repeated. The prospectus contains important detailed information about the Horizons Exchange Traded Products. Please read the relevant prospectus before investing.

The Horizons Exchange Traded Products consist of the Horizons Index ETFs ("Index ETFs"), 2x Daily Bull and -2x Daily Bear ETFs ("2x Daily ETFs"), Inverse ETFs ("Inverse ETFs"), VIX ETFs (defined below) and active ETFs. The 2x Daily ETFs and certain other Horizons Exchange Traded Products use leveraged investment techniques that can magnify gains and losses and may result in greater volatility of returns. These Horizons Exchange Traded Products are subject to leverage risk and may be subject to aggressive investment risk and price volatility risk, which, where applicable, are described in their respective prospectuses. Each 2x Daily ETF seeks a return, before fees and expenses, that is either 200% or -200% of the performance of a specified underlying index, commodity or benchmark (the "Target") for a single day. Each Index ETF or Inverse ETF seeks a return that is 100% or -100%, respectively, of the performance of a Target. Due to the compounding of daily returns, a 2x Daily ETF's or Inverse ETF's returns over periods other than one day will likely differ in amount and possibly direction from the performance of their respective Target(s) for the same period. The Horizons Exchange Traded Products whose Target is the S&P 500 VIX Short-Term Futures Index™ (the "VIX ETFs"), one of which is a 2x Daily ETF and one of which is an Index ETF, as described in their prospectus, are speculative investment tools that are not conventional investments. The VIX ETFs' Target is highly volatile. As a result, the VIX ETFs are not generally viewed as stand-alone long-term investments. Historically, the VIX ETFs' Target has tended to revert to a historical mean. As a result, the performance of the VIX ETFs' Target is expected to be negative over the longer term and neither the VIX ETFs nor their Target are expected to have positive long term performance. Investors should monitor their holdings, as frequently as daily, to ensure that they remain consistent with their investment strategies.

*The indicated rates of return are the historical annual compounded total returns including changes in per unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. The rates of return shown in the table are not intended to reflect future values of the ETF or returns on investment in the ETF. Only the returns for periods of one year or greater are annualized returns.