Quantcast

Copper ETFs: 3 Reasons They Never Caught On (And How You Should Invest Instead)


Many investors in commodities gravitate toward precious metals like gold and silver. But even though its price is a lot lower on a per-pound basis, copper has played a much more important role in the world's infrastructure. With uses that include wiring, plumbing, and electronic circuitry, copper prices are closely connected to the health of the industrial economy.

The rise of the exchange-traded fund led to a host of specialized investments that focused on single areas of the market, and some fund managers created copper ETFs to offer investors a way to track the performance of the metal. However, none of them has really gained enough popularity to be a particularly strong choice for investors who want to get exposure to the copper market. Most investors have chosen instead to find another way to invest in copper.

Copper ETF

Assets Under Management

Expense Ratio

1-Year Return

Global X Copper Miners

$84 million

0.65%

17%

iPath Bloomberg Copper Subindex Total Return ETN

$67 million

0.75%

14%

United States Copper Fund

$14 million

0.80%

14%

iPath Series B Bloomberg Copper Subindex Total Return

$10 million

0.45%

NM

iPath Pure Beta Copper ETN

$1 million

0.75%

17%

Data source: Fund providers, ETFdb.com. NM = not meaningful as investment has existed for less than one year.

Tough times for copper

The most important reason why copper ETFs have never really taken off with investors is that they came out at what proved to be a particularly inopportune time for the copper market. Between 2011 and 2016, copper plunged, and the Global X ETF of copper mining stocks lost more than 80% of its value. Losses for the other funds listed above, which aim to track various measures of copper prices rather than the stocks of companies that produce copper, were less severe but were still problematic. After hitting $4.50 per pound in late 2010 and early 2011, prices eventually dropped to the $2 per pound level before bouncing back.

The challenge that exchange-traded funds face is that in a competitive environment, new ETFs have to gain interest quickly in order to be financially viable. Even if a fund charged a 1% expense ratio -- quite high for an ETF -- assets of $10 million will only bring in $100,000 in annual revenue for the fund. That's typically not enough to pay expenses, let alone make a profit. Even the $1 million that a $100 million fund can bring in isn't as profitable as you'd think, and funds typically want to reach the $1 billion mark that several popular ETFs in the gold and silver markets have achieved. Copper's bad performance put the nail in these ETFs' coffins early on, and they've never really recovered.

Long thin sheets of copper plate.

Copper plate. Image source: Teck Resources.

Is copper coming back?

Fundamentally, though, copper is on the upswing, and a strengthening industrial environment is the best explanation for the positive performance. Copper prices have climbed back above $3 per pound, and returns on both copper mining stocks and physical copper ETFs have looked much better over the past year than they have for quite a while.

Still, many investors have concluded that investing in copper-specific ETFs isn't necessarily as smart as getting more diversified exposure to industrial metals more broadly. Mining ETFs include not only copper miners but also those companies that produce precious metals and other base metals. Many of them have far more assets under management than the copper ETFs, allowing for more sustainable business models for the funds.

Other investors choose simply to invest in the companies that produce copper directly . Southern Copper (NYSE: SCCO) is a relatively pure play on copper, but even it produces molybdenum, zinc, lead, coal, and silver in addition to its namesake metal. Other key producers like Teck Resources (NYSE: TECK) and Freeport-McMoRan (NYSE: FCX) produce multiple types of metals, with Teck offering substantial assets in zinc and coal as well as copper, while Freeport has gold-producing assets as well as exposure to the energy industry through various exploration and production projects.

Be smart about copper

If you like the prospects for copper, it's tempting to turn to specific copper ETFs. Given their limited assets, however, you should think carefully about alternatives like buying copper mining stocks directly. Even with copper making a recovery, it's unlikely that copper ETFs will ever reach the status that other successful ETFs have achieved.

10 stocks we like better than Freeport-McMoRan Inc
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Freeport-McMoRan Inc wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of March 5, 2018

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: Personal Finance , Stocks
Referenced Symbols: SCCO , TECK , FCX



More from Motley Fool

Subscribe






Motley Fool
Contributor:

Motley Fool

Market News, Investing










Research Brokers before you trade

Want to trade FX?