Commodities have shown extreme weakness this year while many other sectors have held up quite well. However, recent trends in the space have been encouraging, as most commodities have rebounded from their lows or are even moving higher.
This is especially true with the industrial metals that have attracted investor interest in the past couple of weeks, leading to huge inflows. China, the major driver of industrial metals, is showing signs of stabilizing with strong trade data leading many to feel more bullish on the space.
Improving demand from China, Euro zone escaping recession, tight supply conditions, and a weak dollar of late are adding to the bullish fundamentals for the metals (read:Copper ETFs Surge on Solid China Trade Data).
Further, the increased chances of the Fed curtailing stimulus have led to uncertainty in the market. Investors are thinking that the equity markets have reached the highest level and could slump, or stay range bound, from here. As such, they are moving to commodities, which look cheaper at current levels.
Given the bullish trend at present, investors may want to consider cycling into the industrial metal space in order to obtain a nice momentum play as we move ahead in the final part of the year.
While looking at individual metals is certainly an option, focus on top ranked broad industrial metal ETFs could be a less risky way of tapping the same broad trends (see more ETFs in theZacks ETF Center).
Top Ranked Industrial Metal ETFs in Focus
We have found a number of ETFs or ETNs that have the Zacks ETF Rank of 2 or ‘Buy’ rating in the industrial metal space and are thus expected to outperform in the months to come.
While all these top ranked products are likely to outperform, the following three funds could be good choices to tap into the space. This trio has enjoyed strong momentum over the past few weeks, and has potentially superior weighting methodologies or focuses which could allow them to continue leading the industrial metal space in the months ahead too.
PowerShares DB Base Metals Fund (DBB)
This product tracks the DBIQ Optimum Yield Industrial Metals Index Excess Return, which is a rules-based index consisting of futures contracts on some of the most heavily traded base metals commodities in the world.
The fund holds three commodities – aluminum, copper, and zinc – in equal weights. The ETF has amassed $273.9 million in its asset base and trades in average daily volume of more than 230,000 shares. This would probably ensure slight or no additional cost beyond the expense ratio of 0.78%.
Though DBB lost about 10% in the year-to-date time frame, it added over 6% so far this month, suggesting a modest turnaround may be at hand in this product (read: 2 Commodity ETFs Offering Investors Sweet Returns).
ETRACS CMCI Industrial Metals Total Return ETN (UBM)
This ETN provides exposure to the portfolio of commodity futures through a single investment by tracking the UBS Bloomberg CMCI Industrial Metals Index Total Return. The benchmark seeks to deliver returns from a basket of six futures contracts representing the industrial metals sector. The commodity futures contracts are diversified across five constant maturities ranging from three months to three years out.
In terms of holdings, big chunks of the assets are tied to copper and high grade copper, as these two account for 46% of the assets. Aluminum (30%), zinc (10%), nickel (10%) and lead (5%) round out the rest of the portfolio, meaning exposure is reasonably well spread out.