Industrial metals of late have been given a solid boost thanks
to the new found optimism over the broad American industrial
industry. However, the metals have yet to receive support from
the emerging markets which are reeling from the economic
slowdown.
In fact, one of the major price drivers for industrial metals
is demand from emerging markets, especially China which accounts
for the maximum consumption of these metals.
Of course, the Chinese economy of late has been trying to
accelerate industrial production in order to spur an increase in
global consumption demand for its products. This is mainly thanks
to a series of monetary easing measures undertaken by central
banks worldwide (see
Top Ranked Industrial ETF in Focus: PRN
).
While the weak global outlook for over a year had kept the
prices at depressed levels arising out of oversupply, the
monetary measures from the central banks are sure to provide
relief to the pent-up consumption demand in the coming months as
well.
For example, the industrial metals got a boost during
September of this year when the Federal Reserve announced the
third round of monetary easing known as quantitative easing 3
(QE3) (read
ETFs in a QE3 World
).
This is in turn expected to boost demand in the commodity
space, especially metals. This could push prices upward as
industrial demand increases and investor confidence is restored
in the riskier asset classes here in 2013.
Given this, a look at a top ranked Industrial metal ETN could
be the way to target the best of the segment. One way to do this
is by using the Zacks ETF Rank.
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in
the context of our outlook of the underlying industry, sector,
style box, or asset class. Our proprietary methodology also takes
into account the risk preferences of investors as well.
The aim of our models is to select the best
ETFs
within each risk category. We assign each ETF one of five ranks
within each risk bucket. Thus, Zacks Rank reflects the expected
return of an ETF relative to other ETFs with similar level of
risk (see more in the
Zacks ETF Center
).
Using this strategy, we have found a Ranked 1 or 'Strong Buy'
Industrial Metal ETN which we have highlighted in greater detail
below:
iPath Dow Jones UBS Industrial Metals Sub Index Total
Return ETN (
JJM
)
The Exchange traded note (ETN) by Barclays iPath provides
exposure in four industrial metals: Aluminum, Zinc, Nickel and
Copper. The ETN was launched in October of 2007 and since then
has been able to amass an asset base of $30.5 million.
This being an ETN will not be subject to any tracking error,
however, it will be subject to the default risk of the underlying
issuer. Also, it has a fairly steep expense ratio of 75 basis
points which might be a matter of concern for investors.
The ETN invests in future contracts of the underlying metals
in order to provide similar exposure to their spot prices. This
makes the ETN highly susceptible to contango and in turn
increases its volatility (see
Natural Gas ETFs: Futures vs. Equities
). JJM has a three year annualized standard deviation of
27.5%.
Copper accounts for maximum allocation in its portfolio with
39%. This is followed by Aluminum (30.74%), Zinc (17.79%) and
Nickel (12.57%).
JJM has a three year beta value of 0.84 against the S&P
500. It also provides inter asset class diversification from
equities as indicated by a three year R-squared value of 32%
against the S&P 500 index.
However, its thin average daily volume of just over 16,000
shares is a matter of concern for the investors as it increases
the bid-ask spread of the ETN, thereby increasing the total cost
of investing in the ETN (read
The Guide to Broad Metals and Mining ETFs
).
From a performance perspective, the ETN has been under a bit
of pressure over the past year, losing about 10% in the time
frame. However, we still think that as the economy improves a
upturn in the fortunes of this ETN seems likely, which is why we
give this product a Zacks ETF Rank of 1 or 'Strong Buy'.
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IPATH-DJ-A I MT (JJM): ETF Research Reports
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