Canadian Securities Course (CSC) Level 2 Practice Exam

Which type of Commodity exchange traded fund invests directly with gold/silver and closely matches the spot price?

1. Equity based

2. Futures based

3. Inverse exchange traded fund

4. Physical based

The correct answer is: Physical based

The correct response highlights that a physical-based commodity exchange traded fund (ETF) invests directly in the underlying physical assets, such as gold or silver. This type of ETF holds the actual metals in a secure vault, which enables it to closely track the spot price of these commodities. As a result, investors can gain exposure to the price movements of gold or silver without needing to manage the physical storage of these metals themselves. In contrast, other types of ETFs may not provide the same direct exposure to the commodities themselves. Equity-based ETFs typically invest in stocks of companies involved in the production of commodities rather than the commodities directly. Futures-based ETFs invest in futures contracts, which can result in differences between the ETF price and the underlying spot price due to factors like roll yield. Inverse exchange traded funds are designed to provide the opposite of the performance of the underlying asset, which means they do not track the spot price of gold or silver directly. Therefore, the physical-based ETF is the most suitable choice for those looking to invest directly in gold or silver and closely match the spot price.