Quick Investor Guide To Aluminum ETFs (ALUM, DBB, JJU, IYM, AA)

Jean Folger: Aluminum appears on the period table of elements as part of the ordinary metals group. At one point, aluminum was considered a noble metal along with gold and silver: Napoleon III supposedly served his most prominent guests on aluminum plates. Today, aluminum is light and strong enough to be used in a variety of applications, yet inexpensive enough to be in every kitchen [for more aluminum news and analysis subscribe to our free newsletter].

Aluminum is the most abundant metallic element on Earth but is too reactive to occur as a free metal in nature. Instead, it is found combined in more than 270 minerals including bauxite, the chief source of aluminum. Bauxite is found primarily in Australia, Brazil, Guinea, China, Jamaica and India. Through a reduction process, four tons of bauxite can produce one ton of aluminum. The primary advantage that aluminum holds over steel is that aluminum does not rust; rather, when it is exposed to air, it protects itself with a thin layer of corundum – one of the hardest known substances, and harder than the aluminum itself.

The largest producers of aluminum include China, Russia, North America and Australia. A prominent company in the aluminum industry is Alcoa (NYSE:AA) which, in addition to mining, also refines, smelts, fabricates and recycles aluminum [see also The Ten Commandments of Commodity Investing].

Price Drivers

Transportation is the most important sector for aluminum is one of the largest drivers of aluminum demand. The increased need for fuel-efficient vehicles has increased the demand for aluminum, which offers a 55% weight savings over equivalent steel in automobile manufacturing, while matching or exceeding crashworthiness standards. Aluminum’s strength and weight also makes it an ideal building material for trains, ferries and tractor-trailers.

Emerging market demand, such as China and India, also has a significant impact on aluminum prices. China currently represents about 40% of the world’s aluminum consumption, and its demand is expected to increase 8 to 10% each year over the next five years. Global aluminum supplies, which Alcoa forecasts will be at a deficit for 2012, could cause prices to rise [see also 25 Things Every Financial Advisor Should Know About Commodities].

Aluminum ETFs

While physical exposure to aluminum is not possible at this point, investors can trade futures contracts on aluminum and trade stocks of companies actively engaged in some aspect of the aluminum industry. In addition, a small selection of exchange-traded products is available to investors wanting aluminum exposure.

  • Global X Aluminum ETF (NYSEARCA:ALUM): ALUM, the only pure play aluminum ETF on the market, seeks to replicate the performance of the Solactive Global Aluminum Index, a benchmark comprised of companies active in the aluminum industry, including the mining, production or refinement of aluminum. Launched on January 4, 2011, ALUM has 27 holdings including Rio Tinto PLC (14.1%) and Alcoa Inc (10.3%). It has an expense ratio of 0.69%, net assets of $2.22 million, and a three-month average volume of 1,925.
  • PowerShares DB Base Metals (NYSEARCA:DBB): The PowerShares DB Base Metals fund provides some exposure to aluminum, and seeks to track changes in the level of the DBIQ Optimum Yield Industrial Metals Excess Return (the “Index”), reflecting the performance of the industrial metals sector, plus the interest income from the Fund’s US Treasury securities holdings. The Index is composed of futures contracts on liquid and widely-used base metals, including aluminum, zinc and copper. Launched on January 5, 2007, DBB has an expense ratio of 0.78%, net assets of $300 million, and a three-month average volume of 89,000 [see also The Guide To The Biggest Companies In Every Major Commodity Sector].
  • iPath DJ-UBS Aluminum Subindex Total Return ETN (NYSEARCA:JJU): The iPath DJ-UBS Aluminum Subindex Total Return ETN is designed to give investors exposure to the Dow Jones-UBS Aluminum Subindex Total Return (the “Index”). The Index reflects the potential returns of unleveraged investments in aluminum futures contracts, and consists of one futures contract. With an inception date of June 24, 2008, JJU has an expense ratio of 0.75%, net assets of $3.2 million, and a three-month average volume of 2,312.
  • iShares Dow Jones U.S. Basic Materials Sector Index Fund (NYSEARCA:IYM): The iShares Dow Jones U.S. Basic Materials fund provides investors with a small amount of exposure to aluminum producers. The fund seeks investment results that correspond to the price and yield performance of the basic material economic sector of the U.S. equity market. The fund’s holdings include stocks in the chemicals, industrial metals & mining, mining, and forestry & paper sectors (Alcoa Inc represents. With an inception date of June 12, 2000, IYM has an expense ratio of 0.47%, net assets of $493 million, and a three-month average volume of 166,100.

The Value of Aluminum

Though once considered more valuable than gold, aluminum is the most abundant metal found in Earth’s crust. Aluminum is widely used in construction, packaging and transportation, and demand it expected to increase in emerging market economies. No physically-backed ETF exists yet for aluminum; however, this may change in the future and would likely affect aluminum prices if and when it comes to market.

Written By Jean Folger From CommodityHQ  Disclosure: No Positions.

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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