What Lies Ahead For Copper ETFs? [Freeport-McMoRan Copper & Gold Inc., First Trust ISE Global Copper Index Fund]

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April 18, 2014 12:22pm NASDAQ:CU NYSE:COPX

copperSurprisingly, the recent Chile earthquake that resulted in a tsunami did not leave a sustained impact on copper ETFs. Chile accounts for nearly one-third of the world’s total copper output, and as such, has a huge influence over the price of the red metal.

Chile’s government also owns and operates Codelco, the largest copper producing company in the world.

Though Chile’s government has assured investors that the copper mine was unscathed, many expected that any delay in production or shipments might drive copper prices higher.

However, copper ETFs gained modestly soon after the earthquake last week only to nosedive the next day, proving investors wrong. Notably, the red metal saw double-digit losses in the first two and half months of this year mainly on China growth concerns. Nearly one-fourth of all Chilean exports are shipped to China, making copper highly vulnerable to the world’s second largest economy.

Prior to the Chilean earthquake, copper prices sprung back from the 3-1/2 year lows in mid March on news of China adding fuel to its economy to trigger growth. Copper was battered in the beginning of this year after China divulged waning manufacturing numbers three month in a row with the latest plunging to an eight-month low level (read: Copper ETFs Tumble on China Growth Concerns).

Quite understandably, a manufacturing slowdown in the world’s biggest buyer of industrial metals led copper prices to tumble 11% in Q1, the deepest since 2011. To lift some clouds over the economy, China has now planned a stimulus package mainly targeted at railways and other construction investment. Efforts to perk up construction projects have in turn spread enthusiasm on copper investing, encouraging some to believe that copper may turn around in Q2.

Though Copper futures for May delivery fell in recent trading on fears of reduced U.S. demand emanating from lower-than-expected job growth data, investors still may have some hopes on this metal space thanks to the Chinese mini stimulus.

While investing in futures is definitely an option, investors might watch exchange traded product choices as well as these represent simple ways for the average investor to cycle into the copper market:

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 over $90 million of assets under management, while its expense ratio comes in at 75 basis points a year.

Though the product is easily the most popular, 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.

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.

The ETF has a definite skew toward smaller securities as large caps account for just one-third of the total.

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 weight to each security in the portfolio, while it charges investors 70 basis points a year in fees for the exposure (see all the materials ETFs here).

Large caps account for roughly two-fifths of assets in this fund, followed by about one-third in mid cap stocks.

What Lies Ahead?

Though a China stimulus is a positive for the metal, the road ahead is expected to remain bumpy. Analysts normally have a mixed view on the metal’s future. While there are some solid drivers like increased construction activities in the U.S., some emerging markets are falling short on the growth front.

Amid such a backdrop, China’s fiscal stimulus will likely prove a boon to this industrial metal, even if Chile exports and an expected short-term disruption in the shipping industry fail to sustain optimism around the red metal in the near term.

This article is brought to you courtesy of Eric Dutram.

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