[Correction: Due to an editorial error, ETCs were incorrectly compared to U.S. ETNs.  ETCs are notes but they are backed by commodity contracts purchased from Shell Oil (in the case of the oil contracts) or AIG (in the case of the other commodity products.)]

Commodities have attracted a great deal of investor interest so far this decade, as prices have risen steadily from multiyear lows around the turn of the millennium. Commodity exchange-traded funds and other forms of exchange-traded security (notably ETC—exchange-traded commodities) have been an area of huge asset growth and very active product development, in many cases opening up the sector to retail investor flows for the first time, or at least making market access a great deal easier.

As I've done in previous articles on European equity and fixed-income ETFs for www.indexuniverse.com, let's start with a list of the top 15 European commodity ETFs/ETCs by assets under management.

ETFs Vs. ETCs

It is important to point out that while there is a difference between ETFs and ETCs—the main difference being that ETCs use a secured, undated, zero-coupon note structure, whereas ETFs are funds—they are otherwise similar in that both are open-ended, continuously traded and have multiple market makers.

In terms of an investor's counterparty exposure, there are subtle differences, which are worth being aware of. The precious-metal ETCs are backed by allocated bullion in vaults. In the case of ETF Securities' energy and nonenergy ETCs, there is the counterparty exposure to Shell and AIG, respectively. For broader commodity index ETFs offered by the other main players, there may be exposure to multiple counterparties, as the funds invest in futures or swaps rather than the physical commodities, so in each case it's worth checking the relevant prospectus to find out where the exposure lies.

Top 15 European Listed Commodity ETFs/ETCs by AUM*

Asset Class Exposure And Fund Structure

As we can see from the table, 7 of the top 15 and 4 of the top 5 European ETFs/ETCs by assets under management represent precious metals exposure. Gold, silver and other precious metal ETFs have been one of the major success stories of the decade, and the European market is no different from the US, where we have seen the phenomenal growth rate of the streetTRACKS Gold Trust (AMEX: GLD) and similar funds. Having had personal experience of investing in gold earlier in the decade via the inefficient and costly route of bullion coins, it is clear that gold/silver/platinum ETFs/ETCs have offered a quantum leap in ease of use to investors. With governments and central banks continuing their bailouts of the financial sector and devaluing their (fiat) currencies, it is hard to see what will prevent these vehicles from attracting ever-greater inflows.

Here a note on fund/note structure and the European regulatory environment is appropriate. The preferred structure for European ETFs is one that complies with the UCITS III rules—regulations needed to allow for Europe-wide distribution. The UCITS III rules, however, set certain minimum diversification requirements, notably an absolute maximum exposure of 35% of any UCITS fund to a single constituent, which in the case of commodities, is viewed by European regulators as a single commodity or group of closely related commodities. Also, commodities are not a permissible asset under UCITS, so a UCITS ETF has to invest in commodity-related derivatives rather than the underlying asset.

By implication, all the European tracking vehicles offering exposure to a single commodity or group of related commodities have tended to be set up as note structures (i.e., ETCs)—such as Lyxor Gold Bullion Securities and all the single-commodity products from ETF Securities.

Confusingly, the successful ZKB precious metals funds, even though tracking single commodities, are all classified as ETFs. They are regulated under Swiss law as "Sondervermoegen", a specific category of open-ended fund, and are not UCITS funds.

When it comes to more-diversified commodity ETFs, it is noticeable how varied the European product providers' offerings are. We have had a proliferation of commodity index launches over recent years, and it seems a case of "take your pick":

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