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Physical Copper ETFs? Not So Fast

November 23rd, 2012

Jared Cummans: For more than two years now, issuers like JP Morgan and iShares have been battling to bring physically-backed copper ETFs to the markets. At first glance, it seems like a solid idea; after all, Gold Trust (NYSEARCA:GLD) and Silver Trust (NYSEARCA:SLV) are two of the most popular ETFs in the world, and each of them offers physical exposure to their respective metals. Yet the proposed copper products remain in the doldrums, as the red tape and roadblocks seem to be endless for these proposed products [for more copper news and analysis subscribe to our free newsletter].

A recent SEC study stated that there was little connection between the flows of commodity-based securities and the prices of the commodities themselves. But a copper users group including AmRod Corp, Southwire Co and Encore Wire Corp, have come out against the study. This group, represented by Vandenberg & Feliu, have stated that the proposed funds would disrupt metal suppliesas well as increase prices. The group went on to call the SEC study “inaccurate and incomplete” in their opposition to these products.

Problems Continue to Mount


Aside from the backlash against these products, there also comes the question of storage. Physically-backed precious metals products make sense because of the high value-to-weight ratios of these commodities. But storing cheap metals like aluminum and copper could bring in considerable costs for the issuer, leading many to wonder if these products are feasible in the first place [see also For Long-Term Investors: The Cheapest ETF for Every Commodity].

Even if the proposed physically-backed products were able to slash those fees, the effective expense ratio of these proposed products could set new records for the ETF industry. It’s important to keep in mind that storage costs are often a primary reason for contango in futures markets, as longer-dated prices include additional months of storage.

With two years and counting for these products to walk through SEC hoops, it seems more and more likely that they will never see the light of day, at least in their current form. It may just be that physically-backed industrial metals products don’t make sense and investors are better off with futures products. Keep an eye out for any developments on this front, but don’t expect it to be a fast-moving process.

Written By Jared Cummans From CommodityHQ  

CommodityHQ offers educational content, analysis, and commentary on global commodity markets. Whether you’re looking to speculate on a short-term jump in crude or establish a long-term allocation to natural resources, CommodityHQ has the information you need.


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