If you've been looking to add metals to your portfolio lately,
you might be confounded by the variety of exchange-traded options
that offer exposure to the market.
Let's shine some light on this pocket of the investment market.
There are many metals to choose from, but I'll focus on copper to
simplify the comparison of the advantages and disadvantages of each
All of the following are viable exchange-traded products that
offer exposure to the copper market, but they do it in different
ways that result in significant exposure and return differences.
So, it's important to understand the various products in order to
match your investment thesis with the right product.
There are three main ways to access copper in an exchange-traded
, commodity ETFs and ETNs (exchange- traded notes). Actually,
physical copper isn't strictly available right now, but it looks
likely that it will be soon, as I discuss below.
First, there are equity ETFs. These ETFs acquire shares of
publicly traded companies that mine or refine copper.
The important thing to understand here is that you're gaining
exposure indirectly, with the company's stock price correlated with
the price of copper. Depending on the company and the diversity of
its operations, that may be a little or a lot.
The fact that exposure in this case is indirect is not
inherently bad or good, it's just reality. Following are two simple
cases for why this avenue of exposure could be good or bad.
Imagine a copper miner or refiner with a competitive
advantage-well positioned in the market and the exclusive producer
of a particular good. Such a firm may have serious pricing power
that allows it to outperform the spot price of copper.
Alternatively, the company could have diverse operations of
which copper is only a small portion. In this case, the company's
stock price is a poor proxy for the price of copper because its
stock price is subject to many factors other than the price of
In this vein, there are currently two options on the market:The
Global X Copper Miners ETF (NYSEArca:COPX) and the First Trust ISE
Global Copper ETF (NasdaqGM:CU).
CU is the better of the two fund, in my opinion, because it uses
a tiered allocation scheme that weights companies by the percentage
of revenue generated from copper production. In contrast, COPX
sticks to a straight market-cap-weighting scheme.
Futures Or Physical
Commodity ETFs are another way to gain exposure to the price of
A commodity copper ETF gains its exposure either by purchasing
physical copper or by using futures contracts. There are advantages
and disadvantages of both.
Buying, storing and selling a physical commodity is far more
expensive than purchasing a futures contract from an exchange, so
operational costs are likely to be high for physically backed
On the other hand, futures contracts are subject to the effect
of contango, which will likely reduce realized yield. Contango
refers to new contracts being more expensive than expiring ones,
which hurts returns-sometimes by a lot over the longer term-as fund
managers maintain exposure.
Currently, the United States Copper Index Fund (NYSEArca:CPER)
is the only option in this category. It uses futures contracts to
gain its exposure, which means it is subject to the deleterious
effects of contango, or negative roll yield. It does, however,
"optimize" those contracts to mitigate those effects.
Two years after filing, the Securities and Exchange Commission
recently granted J.P. Morgan permission to market a physically
backed copper ETF. However, the SEC recently postponed its decision
to allow iShares to market a very similar product, so it's not yet
clear if any physical copper funds will be brought to market
Still, it seems likely, at which point we will finally see if
investors are interested in such products.
The final way to gain exposure to the price of copper is through
an ETN. ETNs are senior debt notes issued by large banks so, in
contrast with ETFs, exchange-traded notes are subject to
The bank promises to pay the returns of the index minus a
management fee, which means there's no tracking fee. But you'll
need to pay particular attention to who your counterparty is and
what index they use.
There are currently two copper ETNs:the iPath Pure Beta Copper
ETN (NYSEArca:CUPM) and the iPath Dow Jones-UBS Copper Total Return
Both ETNs provide the returns (minus fees) of indexes that track
the performance of futures contracts. JJC uses front-month
contracts, whereas CUPM optimizes its contracts in an attempt to
mitigate the effects of contango.
Ultimately, a broad collection of exchange-traded products offer
exposure to the metals market. Each product has a different
approach and offers different exposure.
As always, it's crucial to choose the product that aligns best
with your investment goals.
At the time this article was written, the author held no
positions in the securities mentioned. Contact Spencer Bogart at
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