Trouble Ahead For Copper ETFs? [Global X Copper Miners ETF, Freeport-McMoRan Copper & Gold Inc.]

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March 10, 2014 11:24pm NASDAQ:CU NYSE:COPX

copperMany commodities have seen a solid start to 2014, as products like coffee and sugar have crushed the market in the first two months of the year. However, this commodity boom hasn’t been felt across

the space, as many key resources in the base metal world haven’t seen any gains to start the year.

In fact, copper is now approaching a double digit loss for the year, while it is nearing its 52 week low as well. This is despite a reasonably solid jobs report in the U.S. as well as good manufacturing data, suggesting that events in China are really weighing on the red metal now (see China ETF Investing 101).

China in Focus

It hasn’t exactly been smooth sailing for the world’s second biggest economy lately as concerns over defaults and the banking system have riled the nation’s markets. Additionally, a broad shift away from emerging markets hasn’t helped matters either, leading to some volatile trading in many Chinese securities.

Growth rates in China are also expected to come down, with some looking for GDP growth to fall below 7% this year. And since China makes up roughly 40% of global copper demand, this lower growth rate and lower level of manufacturing activity could reduce demand for copper, keeping prices depressed in the near term.

“Until the Chinese economy picks up and starts using up the supply that is out there, I can’t see copper trading much higher,” said James Cordier, a principal at Liberty Trading Group for a WSJ article. “Unfortunately, there are no signs of that happening right now.”

Copper ETFs

With this sluggish backdrop for the top consumer of copper, it shouldn’t be too surprising to note that a trio of copper ETF options on the market have been seeing weakness lately, and could continue to stumble in the weeks ahead. Investors should definitely monitor these options, as they represent easy ways for the average investor to tap into the copper market, and could continue to see volatility in the months ahead should Chinese economic picture remains cloudy:

iPath Dow Jones UBS Copper ETN (NYSEARCA:JJC)

This ETN offers investors exposure to front month copper futures tracking the Dow Jones UBS Copper Index. The note has just under $90 million under management, while its expense ratio comes in at 75 basis points a year (see all the Industrial Metal ETFs here).

The product is easily the most popular that is focused on the futures market, though investors have a few other options to choose from such as CUPM. Investors should also note that, as an ETN, JJC carries with it the credit from of Barclays, though an ETN will have no tracking error.

JJC crumbled on Friday trading on elevated volume, plunging by 4.1% on the day.

Global X Copper Miners ETF (NYSEARCA:COPX)

This ETF represents an equity option for copper investors, tracking the Solactive Global Copper Miners Index. This benchmark holds 25 stocks in its basket, while it charges investors 65 basis points a year in fees for the exposure.

Investors should note that the fund has a definite skew towards smaller securities as large caps account for just one-third of the total. Meanwhile, American firms make up just 5% of assets, leaving a third for Canada, 14% for Australia, and 11% for the UK.

COPX tumbled by about 3.2% on Friday trading, slumping along with its underlying metal (see all the Materials ETFs here).

First Trust ISE Global Copper Index Fund (NASDAQ:CU)

This copper mining ETF follows the ISE Global Copper Index for exposure, tracking 25 companies across the globe. The fund uses an equal weight methodology, giving roughly the same weights to each security in the portfolio, while it charges investors 70 basis points a year in fees for the exposure.

Large caps make up roughly 40% of assets in this fund, followed by about one-third in mid cap stocks. U.S. copper miners make up just 7% of assets, while Canada (32%) and the UK (20%) dominate from a country look.

This ETF fell about 3.5% in Friday trading, a relatively big loss compared to the S&P 500’s flat performance for the session.

Bottom Line

It doesn’t really seem to matter how the economy is doing in the U.S. for copper, as the jobs report was decent, while the recent manufacturing data has been solid. Instead, copper is trading off of Chinese news and the outlook for the economy in that nation.

And unfortunately for copper investors, that outlook doesn’t appear to be very robust as growth expectations are falling, and concerns over debt are building. A turnaround will definitely be needed here before gains can come back to copper, so until then, it may be best to stay on the sidelines instead of jumping into any of the aforementioned copper-focused ETFs.

This article is brought to you courtesy of Eric Dutram.

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