Top Ranked Industrial Metals ETF In Focus (JJM)
Eric Dutram: Industrial metals of late have been given a solid boost thanks to the new found optimism over the broad American industrial industry. However, the metals have yet to receive support from the emerging markets which are reeling from the economic slowdown.
In fact, one of the major price drivers for industrial metals is demand from emerging markets, especially China which accounts for the maximum consumption of these metals.
Of course, the Chinese economy of late has been trying to accelerate industrial production in order to spur an increase in global consumption demand for its products. This is mainly thanks to a series of monetary easing measures undertaken by central banks worldwide.
While the weak global outlook for over a year had kept the prices at depressed levels arising out of oversupply, the monetary measures from the central banks are sure to provide relief to the pent-up consumption demand in the coming months as well.
For example, the industrial metals got a boost during September of this year when the Federal Reserve announced the third round of monetary easing known as quantitative easing 3 (QE3) (readETFs in a QE3 World).
This is in turn expected to boost demand in the commodity space, especially metals. This could push prices upward as industrial demand increases and investor confidence is restored in the riskier asset classes here in 2013.
Given this, a look at a top ranked Industrial metal ETN could be the way to target the best of the segment. One way to do this is by using the Zacks ETF Rank.
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook of the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors as well.
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, Zacks Rank reflects the expected return of an ETF relative to other ETFs with similar level of risk (see more in the Zacks ETF Center).
Using this strategy, we have found a Ranked 1 or ‘Strong Buy’ Industrial Metal ETN which we have highlighted in greater detail below:
iPath Dow Jones UBS Industrial Metals Sub Index Total Return ETN (NYSEARCA:JJM)
The Exchange traded note (ETN) by Barclays iPath provides exposure in four industrial metals: Aluminum, Zinc, Nickel and Copper. The ETN was launched in October of 2007 and since then has been able to amass an asset base of $30.5 million.
This being an ETN will not be subject to any tracking error, however, it will be subject to the default risk of the underlying issuer. Also, it has a fairly steep expense ratio of 75 basis points which might be a matter of concern for investors.
The ETN invests in future contracts of the underlying metals in order to provide similar exposure to their spot prices. This makes the ETN highly susceptible to contango and in turn increases its volatility (see Natural Gas ETFs: Futures vs. Equities). JJM has a three year annualized standard deviation of 27.5%.
Copper accounts for maximum allocation in its portfolio with 39%. This is followed by Aluminum (30.74%), Zinc (17.79%) and Nickel (12.57%).
JJM has a three year beta value of 0.84 against the S&P 500. It also provides inter asset class diversification from equities as indicated by a three year R-squared value of 32% against the S&P 500 index.
However, its thin average daily volume of just over 16,000 shares is a matter of concern for the investors as it increases the bid-ask spread of the ETN, thereby increasing the total cost of investing in the ETN.
From a performance perspective, the ETN has been under a bit of pressure over the past year, losing about 10% in the time frame. However, we still think that as the economy improves a upturn in the fortunes of this ETN seems likely, which is why we give this product a Zacks ETF Rank of 1 or ‘Strong Buy’.
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.