The price of copper has doubled in the past year, driven by tight supply and strong demand for the industrial metal, leaving some investors wondering how to play the commodity through exchange-traded funds.
Copper prices are currently trading around US$4 per pound, up from US$2 per pound a year ago when the COVID-19 pandemic pounded markets, including demand for copper used in everything from construction to computers. While copper has retreated from its decade high of US$4.36 per pound reached in late February, many investors remain bullish on the so-called red metal.
”The narrative we’ve been hearing is that it’s really a play on the broader reopening of the economy,” says Spencer Barnes, associate vice-president of mutual fund and ETF strategy at Raymond James Ltd. “Copper is cyclical and driven by market expansion, so it’s not surprising how it’s been bid up thanks to the massive push to reopen the economy, and the stimulus we’re seeing.”
Fueling the increase is an anticipated ‘green’ shift in the post-COVID economy, which supports higher demand for copper and other base metals needed in the production of electric vehicles and renewable energy infrastructure.
The handful of ETFs providing direct exposure to copper have seen substantial growth in investor interest over the past year, but there are risks for investors looking to jump in.
The first is that the market enthusiasm for copper may have overshot fundamentals, which is evidenced in the price pullback recent weeks. The drop comesafter China, the world’s largest copper consumer, set an economic growth target of around 6 per cent this year, on the lower end of many economists’ estimates.
”I doubt that this is a repeat of the last commodities super cycle,” John Hood, president and portfolio manager of J.C. Hood Investment Counsel, says of copper’s comeback over the past year.
”A lot of sectors in the market took off in November, some even outpacing the S&P 500, so I’m being very tentative because I think we’re seeing a fair bit of market weakness recently. I’m just taking a stand-off view for the time being.”
For investors who remain bullish on the metal, there are three copper-focused ETF options to choose from. Still, experts say they may not be well-suited to a casual investor.
”These are all tactical funds,” says Elisabeth Kashner director of ETF Research with FactSet Insight. “They’re not core portfolio holdings...for an ordinary investor to bet on a fund like this, you’d have to know how narrow a bet it is and size it accordingly.”
The most popular of the three is Global X Copper Miners ETF COPX-A, with US$660-million in assets under management (AUM) and an expense ratio of 0.65 per cent. The fund has returned about 26 per cent so far this year and about 200 per cent over the past year. (All data from Morningstar as of March 11).
Unlike the next two that play on futures contracts, COPX offers exposure to a basketof about 30 mining companies including top holdings such as India’s Vedanta Ltd., Toronto-based First Quantum Minerals Ltd. and Arizona-based Freeport-McMoRan Inc.
Another ETF is the United States Copper Index Fund CPER-A, with US$208-million in assets and an expense ratio of 0.76 per cent. The fund has returned 17 per cent so far this year and about 65 per cent over one year. CPER attempts to mitigate the risk of contango — when the futures price is above the spot price —by selecting the optimal futures contracts, but there are still significant risks.
”You never know exactly how long it’s going to be, based on what contracts they’re holding,” says Ms. Kashner. “They could be really short-term to the longest term available.”
The smallest of the three is the iPath Series B Bloomberg Copper Subindex Total Return ETN JJC-A, with only US$63-million in assets and an expense ratio of 0.45 per cent. JJC has also returned about 17 per cent so far this year and 65 per cent over the past 12 months. Its structure differs as well; as an exchange-traded note (ETN), it involves some counterparty risk because it’s unsecured debt and subject tothe issuer’s creditworthiness.
Ms. Kashner says COPX is clearly the favourite given its size.
”It gives you exposure not directly to the commodity, but to companies that produce copper,” she says. “A lot of investors have more comfort there than in the commodity and futures markets. Futures are forever maturing and rolling over, and that gets complicated; you need to know how the fund is selecting its contracts, andwhat its roll policies are.”
Mr. Barnes agrees: ”Any futures-based product I slap on that warning,” he says. “These are short-term trading vehicles and given how they have to roll their contracts, that can eat at the capital.”
For investors confident that the underlying market fundamentals for copper are sound, and with an appetite for risk, all three funds have the potential to provide returns. But for most, says Ms. Kashner, ETFs like these are a good place to play with a relatively small amount of fun money, not a place to park major bets.
For investors who do want to dive straight into copper, Mr. Barnes suggests diversifying exposure by blending a bit of exposure to miners, and a bit directly to the commodity.
”But don’t buy any of these to put it in your portfolio and never look at it again,” he says. “That’s not how to approach this very niche part of the market.”