Eric Dutram: Thanks to a strong dollar and lower demand, there have been just a few winners so far this year in the commodity ETF space (Read:Top Commodity ETFs in This Uncertain Market). Some products in the grains or certain soft commodities have added double digits on the year but others have been under significant weakness and have, instead, slumped by double digits in the year-to-date period.
In particular, ETF investors have seen extreme weakness in the industrial metals segment of the industry. These products have been crushed by a slowdown not only in developed markets but emerging nations such as India and China as well. These recessionary threats have kept industrial metals under pressure and have especially hurt one metal—nickel—in 2012.
Nickel prices have fallen sharply when compared to broad commodity markets and against other industrial metals as well. High level of inventories haven’t helped the situation either, especially considering the rapidly depreciating demand picture (read: If China Slumps, Avoid These Three Country ETFs).
The drop in demand for steel also led to the decline in nickel prices as about two-thirds of nickel is used in the making of stainless steel. Furthermore, the recent weakness in dollar trading failed to spur strength in the metal, while it has helped other precious and base metals to recover their losses to some extent, leaving nickel investors worse off compared to their counterparts.
Amid these weak fundamentals and excessive oversupply, nickel ETFs are facing tough times (See more ETFs in the Zacks ETF Center). In view of the circumstances, we do not think that the nickel price and ETFs will see any revival in investor interest anytime soon.
Currently, there are two ETNs available from the issuer Barclays iPath in this space, and both are performing quite poorly. Instead of being invested in, both should probably be avoided or paired with another commodity ETF that has a better outlook in a short/long pairs trade:
iPath Pure Beta Nickel ETN (NYSEARCA:NINI)
Launched in April 2011, this ETN 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.
The product is quite expensive as it charges 75 bps in fees per year and is illiquid (Read: Use Caution When Trading These Three Illiquid ETFs). It trades in paltry volumes of 300 shares on average daily basis that increases the trading cost in the form of bid/ask spread. The fund is unpopular and has attracted only $1.2 million of assets so far in the year. The fund lost about 11.5% of its value so far in 2012.
NINI currently has a Zacks ETF Rank of 5 or ‘Strong Sell’ implying that there is significant bearishness facing the ETN in the months ahead as well.
iPath Dow Jones-UBS Nickel Subindex Total Return (NYSEARCA:JJN)
The ETN provides exposure to nickel and tracks the Dow Jones-UBS Nickel Total Return Sub-Index, before fees and expenses. The benchmark is a sub-index of the Dow Jones-UBS Commodity Index Total Return and delivers returns through an unleveraged investment in the futures contracts on physical commodities comprising the index plus the rate of interest on specified T-Bills (Read: Invest Like The One Percent With These Three ETFs).
The index includes the contract in the Dow Jones-UBS Commodity Index Total Return that relates to a single commodity – nickel. Launched in October 2007, the note has assets of $6.8 million under management (Read: Ten Biggest U.S. Equity Market ETFs).
Like NINI, the product is expensive with expense ratio of 0.75% and has a high bid/ask spread. JJN trades with volumes of about 9,000 shares per day and has lost about 19% of its value so far this year.
JJN also has a Zacks ETF Rank of 5 or ‘Strong Sell’ suggesting a bearish outlook for this product as well.
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