ETFs continue to make their way into portfolios of all styles and sizes as investors have embraced the transparency and cost-efficiency benefits associated with the exchange-traded product structure. As the product lineup grows more diverse, investors have taken advantage of being able to easily tap into a variety of previously difficult-to-reach asset classes. The world of commodities in particular has seen growing interest from ETF investors looking to diversify their portfolios [see Commodity Guru ETFdb Portfolio ].
Many investors looking to make an indirect bet on the global economy have turned to copper. This shiny metal holds great appeal thanks to its wide range of industrial uses in everything from pipes in new housing to plumbing to high tech machinery. With ever-expanding populations and growing rates of urbanization across emerging markets, copper offers a compelling investing thesis as our insatiable appetite for raw materials is expected to grow in the foreseeable future [see also Ultimate Guide To Copper Investing ].
Factors To Consider
Besides obvious factors such as expenses and liquidity, there are several other factors that should be considered when shopping around for a copper ETF:
This one should be a no brainer, but an awful lot of investors overlook the kind of ETP they are buying before establishing a position. In the world of copper ETPs, investors will be faced with both commodity pools, and ETNs. One of the more popular offerings in the space, JJC, is structured as an ETN, and as such, investors are exposed to the inherent credit risk of the issuing institution. CPER, on the other hand, is structured as a commodity pool which requires investors to fill out a K-1 tax form; this nuance may add to the tax burden associated with this product for some investors.
Futures vs. Stock
Another fundamental consideration is how you exactly you wish to achieve exposure to copper; some may wish to establish futures-based exposure to spot prices, while others prefer indirect exposure through copper miners. Given the nature of futures-based products, they must sell the
copper contracts they hold as they approach expiration and buy futures for a further date down the line. This “roll” process certainly affects overall returns; when markets are contangoed—longer-dated futures are more expensive than those approaching expiration—and vice versa for backwardated markets. As such, these products will tend to deviate from spot prices, while the very nature of futures markets also implies that they are quite volatile.
Opting for a commodity producer to tap into copper prices has certain drawbacks of its own. Many copper miners will hedge out their exposure, essentially locking in prices to sell their goods in the future; as such, swings in the spot price of copper won’t always lead to identical fluctuations for copper mining stocks. While the profitability of copper miners is certainly impacted by spot prices, this asset class does not always exhibit perfect correlation with the shiny metal. A major appeal of copper miners ETFs among buy-and-hold investors is that they offer exposure to companies with tangible assets and cash-flow, whereas ETNs consisting of copper futures are simply trading instruments.
Investors who prefer futures-based exposure have an important consideration to make when looking at the available options. Aside from the differences in product structure as mention above, futures-based products can also differ on the basis of roll methodology. The seemingly insignificant decision of just exactly how you roll out exposure into the future as current contracts near expiration can have a material impact on bottom line returns over the long-haul.
The biggest ETN in the space, JJC, is a first-generation commodity ETP, and it rolls out exposure to front month futures. As such, this ETN can serve as a viable short-term trading instrument since it will exhibit higher sensitivity to spot prices, although the impact of contango will likely eat away at returns over the long-haul. CPER and CUPM on the other hand employ unique methodologies that spread out copper futures exposure over various maturities in an effort to minimize the adverse effects of contango.