Industrial Metal ETFs In Focus (JJN, NINI)
Eric Dutram: Nickel underperformed the broader commodity markets since the beginning of the year due to high stockpiles and a weakening demand. The metal has also been crushed by the recession in the Euro-zone, and slowdown in major emerging nations such as China, and India. (read: Tough Times for Nickel ETFs?).
Now, with another round of monetary stimulus from central banks in many countries flowing into the markets, the sentiment regarding this industrial metal has been turning positive. Further, US now appears to continue on the modest recovery track. If the global economy recovers, nickel prices would get a boost from the rising global demand for stainless steel, as about two-thirds of nickel goes into the making of stainless steel.
Further, given the huge cash outflows by the Fed in the market, the dollar would likely weaken leading to strength in metal prices. The recent weakness in dollar has helped precious and other base metals to recover their losses (read: Commodity ETFs in Focus as Fed Unleashes QE3).
Based on improving global clues, investors could easily play the bullish trend in the industrial metals space by investing in top ranked ETFs (see more ETFs in the Zacks ETF Center).
Below, we have analyzed two Zacks #1 Rank (Strong Buy) nickel ETFs – iPath Dow Jones-UBS Nickel Subindex Total Return ETN (JJN) and iPath Pure Beta Nickel ETN (NINI) – as we expect these funds to outperform their peers.
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely Low, Medium, or High.
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, the Zacks Rank reflects the expected return of an ETF relative to other products with a similar level of risk.
iPath Dow Jones-UBS Nickel Subindex Total Return ETN (NYSEARCA:JJN)
JJN tracks the Dow Jones-UBS Nickel Total Return Sub-Index, a subset of the Dow Jones-UBS Commodity Index Total Return. The index delivers returns through an unleveraged investment in the futures contracts on physical commodities comprising the index plus the rate of interest that can be earned on cash collateral invested in specified T-Bills. The index includes the contract in the Dow Jones-UBS Commodity Index Total Return that relates to a single commodity – nickel.
The industrial metals funds are generally more expensive than precious metals products in terms of operating costs. Investors have to pay 75 bps in annual fees and the extra cost for wide bid/ask spread thanks to paltry volume of trading. JJN trades with volumes of about 2,000 shares per day. The fund has delivered negative returns of 2.17% year-to-date (as of September 25).
Though the product was launched in October 2007, it has so far attracted only $6.6 million in assets. But of late, this product has shown strong momentum (the change in the fund’s price over the past three months) with value closer to 113, suggesting that it will continue to move higher relative to its counterparts (read: Do You Need a High Momentum ETF?). Further, it got an excellent boost during the three-month period ending September 25, returning over 13%. Further it has surged about 22% from its 52-weeks low.
iPath Pure Beta Nickel ETN (NYSEARCA:NINI)
This ETN product seeks to match the performance of the Barclays Capital Nickel Pure Beta TR Index, which focuses on Nickel futures trading on the LME.
The index generally comprises single futures contract with the exception of two contracts during the roll period (expiration). Unlike many commodity indices, the index offers roll into one of a number of futures contracts with varying expiration dates, as selected using the Barclays Capital Pure Beta Series 2 methodology. This methodology avoids the effect of contango.
With a trading volume of 700 shares per day, the product charges higher cost in the form of bid/ask spread, beyond the expense ratio of 0.75% (read: Use Caution When Trading These Three Illiquid ETFs). The fund is unpopular and has attracted only $1.4 million of assets so far in the year. It delivered negative returns of about 1% year-to-date (as of September 25).
The ETN, launched in April 2011, has returned about 4% over the last year and climbed more than 15% from its 52-week low price.
Like JJN, this ETN has also shown robust momentum in the last three months, suggesting that it could be an intriguing choice for investors looking to tap the current opportunity. The product has generated impressive returns of nearly 12% over the last three months (as of September 25).
In 1978, Len Zacks discovered the power of earnings estimates revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank, a peerless stock rating system whose Strong Buy recommendation has an average return of 26% per year.