"Following on from recent questions regarding the accuracy of ETFs and ETCs that aim to track respective instruments, would I be correct in suggesting that spread betting the price of the underlying commodity or index itself offers a more accurate and clear way to invest?

"I write as an amateur investor who has, until now, only used ETFs and ETCs but is toying with the idea of opening a spread betting account. By making the associated charges and roll costs etc more explicit, I am hoping that this route for investing may offer more correlation with the index or commodity that I am trying to track?

"Finally, any pointers for a beginner spread better?"

Eoin Treacy's view Thank you for this thoughtful email. Regardless of how one decides to deal in commodities, the reality is that there are associated costs which are difficult to circumvent. These range from broker costs to contract rolls and, if using a fund, administration charges and sometimes performance fees.

One of the main reasons investors are disgruntled with the performance of funds that aim to track commodity prices is that they had only a scant understanding of, or underestimated, the effect a widening contango can have on returns. This is primarily why crude oil and natural gas funds underperformed so drastically from early 2009 onwards. Commodity tracking funds are best suited to an environment where commodities trade in backwardation. Unfortunately, these are relatively rare events. Otherwise one is taking the view that the price appreciation will be enough to offset the step up in prices associated with the roll of a commodity in contango.

Spread-betting allows you to manage your risk and your roll costs but there are other considerations. Spread-betting is highly leveraged and requires an additional skill set in terms of disciplined money control tactics.

Spread-bet firms also roll contracts early. This means that investors are not allowed to trade the tightening of contracts that occurs close to roll dates. For example of the spread between Crude Oil's 1st and 2nd month continuation charts shows the contango widening in December and May but closing up immediately before the contract roll date approaches as those short the front month buy it back and roll into the second month. This increases the risk that one is rolled into the next contract at an unfavourable price.

I have never traded in exchange traded commodities because I prefer the leverage of spread-betting and I'm not seeking to hold a passive long position in commodities over the medium to longer term. You will have to assess your own circumstances.

Another potential avenue is to simply hold an array of shares focused on the commodity or sector you are interested in. This would offer less of the leverage and fees associated with futures trading and while they might not perform as spectacularly as the raw commodities, you should at least have an approximation of the available return. For the precious metals at least, funds exist that are backed by physical metal rather than debt instruments.

The only tip I would offer to a new spread-better is to start small and trade well within your capital.