Would A Physical Copper ETF Work Or Is It More Trouble Than It Is Worth?
Jared Cummans: Over the past two years, a number of issuers like iShares and JP Morgan have filed for a physical copper ETF; something investors have been wanting for quite some time. 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. But despite the popularity of the physical structure, it may not make much sense for this industrial metal to be adopted into such an ETF [for more copper ETF news and analysis subscribe to our free newsletter].
First, investors need to consider the value of the current physically-backed products. For the time being, the only physical ETFs on the market focus on the four precious metals: gold, silver, platinum and palladium. At today’s prices, an ounce of each of these metals is worth approximately $1,745 (gold), $34 (silver), $1,615 (platinum) and $665 (palladium). With these relatively high prices, storing the physical metals allows for a high value with relatively little inventory. Copper, on the other hand, is a different story.
The Cost Equation
The current price for an ounce of copper is about $3.5. That means it would take roughly 10X the amount of copper to match the same value of physical silver, 190X the amount for palladium, 460X the amount for platinum and 500X the amount for gold. And this is likely the biggest issue facing these proposed funds: costs. The amount of money it would cost to store enough copper to create a fund would hit the issuer hard and would likely get passed on to investors through an exorbitant expense ratio [see also The Top 10 Cheapest And Most Expensive ETFs].
With the ETF world heavily focused on cost competition, it seems unlikely that a product that falls on the higher side of total expenses would be competitive. And cost is not the only issue at hand, as a recent study has put up yet another barrier for these products.
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, has stated that the proposed funds would disrupt metal supplies as well as increase prices. The group went on to call the SEC study “inaccurate and incomplete” in their opposition to these products [see also Everything You Need To Know About Commodity ETFs].
There is no doubt that there would be high demand for a physically-backed copper ETF, but the question is whether or not it is a truly feasible idea. Would anyone be able to store the metal at reasonable prices without driving up the expense ratio of the proposed funds? Or would a product of this nature disrupt the pricing of one of the most popular industrial metals in the world? That still remains to be seen. For now, investors can only wait and see if this idea will ever come to fruition.
What do you all think, would a physical copper ETF work or is it more trouble than it is worth? Let us know in the comments below.
Related Tickers: First Trust ISE Global Copper Index Fund (NASDAQ:CU), iPath Dow Jones-UBS Copper Subindex Total Return ETN (NYSEARCA:JJC), Rio Tinto (NYSE:RIO), Freeport-McMoran Copper & Gold (NYSE:FCX), Southern Copper (NASDAQ:SCCO).
Written By Jared Cummans From ETF Database Disclosure: No positions at time of writing.
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