JP Morgan, the Wall Street firm that has slowly worked its way
into the ETF market, could be one step closer to listing a copper
ETF on the NYSE Arca platform if the latest round of paperwork
hitting the regulatory pipeline is any indication.
This month, the New York Stock Exchange filed paperwork
requesting exemptions it needs in order to have the JPM XF Physical
Copper Trust go on its board. The fund would be only the market's
second copper ETF, but the first to serve up exposure to the copper
market through a physically backed portfolio.
Just recently, United States Commodity Funds launched the
futures-based United States Copper ETF (NYSEArca:CPER), which put
in an ETF wrapper a strategy that had until November only been
available in ETNs such as the $2.48 million iPath Pure Beta Copper
ETN (NYSEArca:CUPM) and the $209.5 million iPath Dow Jones
UBS-Copper Total Return ETN (NYSEArca:JJC).
Copper is directly linked to the infrastructure sector where
it's widely used for electrical cables and grids as well as for
telecommunications platforms. The copper market has benefited from
growing demand from emerging markets such as China, which alone
consumes nearly 40 percent of the global copper supply, and has
caught investors' attention.
"Going long copper is a way to express a view that you think the
global real economy is going to do OK without having to make the
concurrent bet that the financial markets will also do well," John
Hyland, chief investment officer at United States Commodity Funds,
said in an interview.
Hyland said that betting on industrial metals, such as copper,
is also a way of hedging a portfolio against inflation and a
falling U.S. dollar because, historically, copper prices are
positively correlated to inflation, and that correlation is even
more prominent to a weakening dollar.
"Higher inflation, in combination with continued real-world GDP
growth, could very well help copper investments while at the same
time hurting stocks and bonds," he said.
Physically Backed Vs. Futures Based
The JP Morgan copper ETF will give investors exposure to the
spot price of copper of the London Metals Exchange. The trust will
hold copper in warehouses located in the Netherlands, Singapore,
South Korea and the U.S., according to the most recent filing.
By comparison, U.S. Commodity Funds' CPER invests in futures
contracts; namely, the cheapest monthly Comex copper futures
contracts over an 18-month span. The fund has gathered $2.56
million since inception.
CPER's design takes to heart the problem of contango, which is
when the soonest-to-expire contract is the cheapest in the futures
curve causing fund managers to have to pay up as they roll the
position into another contract upon expiration. Contango eats up
returns over time.
Contango can also affect whether owning copper through a
futures-based fund is a more prospective idea than buying a
physically backed fund, and that's a constantly moving target,
"Right now, the NY copper futures market is mildly in contango
in the front of the curve while moving into backwardation some
distance out," Hyland said. "If you bought the front-month contract
and rolled it, the annualized 'cost' of contango is running about
By contrast, if a physical ETF bought spot copper and stored
it-as JP Morgan's fund plans to do-assuming it costs around 35
cents per ton per day to store the metal in an LME warehouse, that
annualized cost would be -1.8 percent, Hyland estimated.
Still, the comparison wouldn't be fair without taking into
account how much each ETF costs, something that's still unknown
about JP Morgan's fund, as well as without knowing the annualized
cost of actually buying and selling futures contracts or physical
"CPER's annual commissions are running around 8 basis points,"
Hyland said. "I have no idea what to assume for the physical copper
ETF. It could be zero, or it could be a different and much higher
JP Morgan has yet to disclose its planned fees for the fund,
something that can also be said about San Francisco-based iShares'
planned physically backed copper ETF currently in the regulatory
When Will It Launch?
When will the JP Morgan fund actually launch? It remains to be
Every time an exchange wants to list a commodities-based,
currency-based or actively managed ETF, it has to file a form 19b-4
to comply with SEC rules under the Investment Act of 1934. Equities
and bond ETFs no longer suffer the same scrutiny because the SEC
has already implemented a "generic" exemption for those types of
The rule requires exchanges to file this extra paperwork for any
security that is either a derivative or a hybrid whose value is
based on the performance of an underlying benchmark.
The form in question essentially says that the ETF will behave
like an ETF should by publishing indicative NAVs throughout the day
as well as an NAV at the end of every day, and by keeping its
holdings transparent, among other things.
The regulatory hurdle is a band-aid solution regulators have put
in place to allow ETFs to fit in a set of trading rules that was
originally designed for closed-end funds and ordinary
Having the NYSE submit its form 19b-4 is only part of the
process it takes to get the JPM XF Physical Copper Trust to go
live, however. The other half of the puzzle is getting the
prospectus for the fund approved by regulators, something that JP
Morgan has yet to do.
In its last filing detailing its plans for the fund back in
July, the company didn't disclose planned fees or storage costs
involved with holding physical copper, and other data deemed
critical if the SEC is to give the ETF a green light.
"If a prospectus is not showing all the data, we still could
have months to go before an ETF comes to market," Hyland said of
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