Our Pick Of The Best Commodity Trading Platforms

Exchange-traded funds (ETFs) provide investors with a ready-made portfolio of assets at a relatively low cost. They typically aim to replicate the performance of an index, such as the Dow Jones US Oil and Gas or Bloomberg Agriculture Index.

The ETF will rise and fall in line with the index, unlike actively-managed funds, where the manager aims to beat the index through stock-picking.

There are three main types of commodity ETFs:

1. Single commodity: these track the price of one commodity, such as gold or crude oil
2. Multiple commodities: these track the price of a basket of commodities, such as industrial metals or agricultural products
3. Commodity-related companies: these track an index based on a portfolio of companies involved in commodity production, such as gold mining or the development of battery technology.

Both types of investment pool money from investors to invest in a portfolio of assets such as commodities. Both funds (OEICs) and investment trusts can be actively-managed, where a fund manager aims to out-perform an index by stock-picking. However, OIECs can also be passively-managed and track an index, similar to an ETF.

They both charge annual management fees, typically from 0.7% upwards for actively-managed investments, although some investment trusts may charge up to 2%.

However, investment trusts are traded with live prices, meaning that investors can time their trades accordingly. OEICs are ‘forward priced’, meaning that investors don’t know the execution price until after the trade is placed.

Investment trusts also have a ‘buy-sell spread’ (explained in more detail in “What fees are charged?” below). This spread may be significant for some investment trusts and can eat into investors’ profits. Whereas OEICs are single-priced and often incur a lower trading fee than investment trusts.

Another key difference is that investment trusts are able to retain, rather than pay out, a proportion of their profit each year. This ‘rainy day fund’ can be used to maintain dividend payments even during stock market downturns.

We’ve looked at general investment accounts (GIAs) that allow investors to buy and sell commodity investments, however, there are a variety of tax-efficient alternatives.

To help with this, we’ve also researched our pick of the best Individual Savings Accounts (ISAs), Self-Invested Personal Pensions (SIPPs) and Junior Stocks and Shares ISAs (JISAs).

These accounts act as ‘tax wrappers’, allowing investors to pay no income tax on dividends or capital gains tax on any profit made on buying and selling investments. However, in the case of SIPPs and JISAs, investors are not able to access the money until a certain age.

Some, but not all, of the providers listed also offer ISA and SIPP accounts, as well as general investment accounts.

Tax treatment depends on one’s individual circumstances and may be subject to future change. The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of tax advice.

There are various types of fees charged by commodity trading platforms:

Share trading fee

This is a flat fee charged by the platform each time an investor buys or sells an investment. Some platforms charge no trading fee (often known as ‘zero commission’ platforms), while others typically charge between £5 to £10 per trade. More frequent traders may benefit from reduced trading fees.

Platforms typically charge a lower, or no, trading fee on (OEIC) funds than ETFs and investment trusts.

Platform fee

This is an annual fee charged for holding investments on the platform. Some platforms charge no fee, others charge a flat fee and some charge a percentage, typically 0.25% to 0.45% of the value of the portfolio, often capped at a fixed amount per year for ETFs (and shares).

There are two categories of percentage-based platform fees:

1. Tiered fee: this is the most usual type of platform fee whereby different rates are charged on different ‘slices’ of the portfolio. For example, for a portfolio worth £300,000, a 0.45% fee might be charged on the first £250,000, then 0.25% on the next £50,000.
2. Non-tiered fee: a small number of platforms charge a non-tiered fee, whereby the same fee is charged across the whole portfolio. For example, a 0.2% fee might be charged on the whole £300,000 of a portfolio.

Foreign exchange fee

If investments are denominated in a currency other than pounds sterling, the majority of platforms charge a foreign exchange (or conversion) fee of around 0.5% to 1.5%. Some providers also charge a higher trading fee for non-UK investments.

A small number of providers allow investors to hold their funds in a foreign currency, which enables them to convert it once and use this ‘pot’ for buying and selling investments in the same currency (reducing the foreign exchange fee on subsequent trades.

Holding non-UK investments also carries exposure to foreign exchange risk. For example, if the pound strengthens against the dollar, US investments will be worth less in sterling (and vice versa).

Other fees

Some platforms charge other fees, such as inactivity fees, withdrawal fees (for accounts held in a currency other than sterling) and higher fees for trading by telephone (rather than online).

Although not technically a fee, platforms also make money on the buy-sell spread on live-traded investments such as ETFs. For example, an ETF might have a buy-sell spread of 110-113 pence. This means that investors would pay 113 pence to buy a share in the ETF and receive 110 pence to sell it. 

Some platforms offer more competitive buy-sell spreads than others, and less-traded investments, such as some investment trusts, may have wider spreads than ETFs.

Accounts can usually be opened online in as little as 10 minutes. Applicants will need to provide some basic information, such as their bank account and National Insurance details.

Electronic checks may be carried out during the initial application process, although applicants may have to supply further documents to support the verification of their identity.

When these checks are complete, and funds have been received, investors are able to start trading. Shares in UK ETFs and investment trusts can be traded live from 8 am to 4.30 pm when the London Stock Exchange is open.

This varies by provider, but many allow the account to be opened with as little as £1 or £25 per month for monthly investing. However, further funds will need to be added to the account, depending on the cost of the investment being purchased.

Investors are required to pay Stamp Duty Reserve Tax (SDRT) of 0.5% on the purchase of UK shares,  however, this is not charged on ETFs.

Investors may also have to pay capital gains tax if they sell investments for a higher price than the purchase price. However, investors have a capital gains allowance meaning that they only have to pay capital gains tax on any profit earned above this allowance in a year.

In addition, investors may have to pay income tax on any dividends received from investments. However, in addition to the personal allowance, there is an additional dividend allowance.

As mentioned earlier, income or capital gains tax is not charged on investments held in ISAs, SIPPs or JISAs.

A limit order is an order to buy or sell shares in a live-traded investment (such as an ETF or investment trust) at, or better than, a specified price. So if a buy limit order was created at 100 pence, the trade would only be executed if the price was 100 pence or below. Similarly a sell limit order is only executed at that price or higher.

A ‘stop loss’ is an order to sell shares in an investment if the price falls to, or below, a set level. It can be a useful tool to limit downside exposure from live-traded commodity investments.

These trading tools can be a good way of achieving a target price for a trade without having to monitor share price movements in real time.

Investing in commodities and other assets always carries some degree of risk, as commodities may lose some, or all, of their value. It’s also worth noting that commodity prices are typically more volatile than equities.

That said, investing in a broad-based portfolio, such as a basket of commodities, or commodity-related companies, tends to be lower-risk than investing in individual commodities.

In terms of the platform, investors should check the FCA register to ensure that the provider is authorised. This provides access to the Financial Ombudsman Service and the Financial Services Compensation Scheme (FSCS) if an issue arises.

The Financial Ombudsman Service will consider complaints against providers and may be able to resolve a complaint if the firm fails to deal with it adequately.

The FSCS will consider claims if the provider goes out of business and owes investors money, however it only relates to certain investment products. If the product is covered, the FSCS may pay up to £85,000 per investor.

It’s also worth checking the protection offered by the general investment account. Some accounts are structured so that investments are held in ‘trust’ to protect investors if the firm runs into financial difficulties.

Investing in commodities can be a good way to produce higher returns than cash-based investments and helps to diversify a portfolio across different assets.

However, commodity investments can go down as well as up, and investors may not get their money back. If you are unsure as to the right path, you should seek financial advice.