Are Copper ETFs Due for a Correction?

Investors have rejoiced in the rebound of the U.S. equity markets this year, but the real winners have been those who were bullish on commodities as the markets bottomed. Hopes of a steady recovery, consistent downward pressure on the dollar, and even strikes at major South American mines have sent prices for metals used in industrial and manufacturing operations skyrocketing in recent months. Copper has been one of the bast performers: the iPath Dow Jones-UBS Copper Total Return ETN (JJC) has gained more than 100% for the year.

But the significant rise in copper prices has been based largely on expectations for increases in demand that are yet to materialize. Global demand has remained weak, and warehouse inventories have been steadily rising as a result. Moreover, demand for new houses, a critical driver of copper demand due to the need for extensive wiring, is showing signs of sustained weakness.

Opinions on where copper will go from here are mixed. Some industry experts believe prices will continue rising through 2011, while others think a downward correction could be just around the corner. Prices have doubled on strong demand from resource-hungry China, but still remain below year-ago levels on relatively weak domestic demand. “The demand for goods is still very soft; the United States economy is just barely recovering,” Allen Sinai, president of Decision Economics, told the New York Times. “In a weak economy where consumer spending is weak, businesses have been slashing left and right. This surprisingly deflationary result reflects that.”

ETF Plays On Copper

For investors looking to make a play on copper prices, JJC is one of the best options available. This exchange-traded note is linked to an index composed of futures contracts on the commodity. JJC has an average daily volume of about 100,000 shares and an expense ratio of 0.75%, making it a highly liquid, relatively inexpensive way to gain exposure to copper prices.

In addition to JJC, there are a number of ETFs that offer exposure to copper prices as part of a diversified basket of metals, including:

• iPath Dow Jones-UBS Industrial Metals ETF (JJM): Invests in copper (44.1%), aluminum (26.8%), zinc (15.5%), and nickel (13.6%).
• PowerShares DB Base Metals Fund (DBB): Invests in zinc (currently 41%), copper (38%), and aluminum (20.9%), with a base weighting of 33.3% for each metal.
• ELEMENTS RICI Metals Total Return ETN (RJZ): Invests in ten different precious and industrial metals, including copper.

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Disclosure: No positions at time of writing.

Comments

[ETFdesk.com:]

interesting article: Doubts Grow on Outlook for Copper and Aluminum bit.ly/26dfE8

Oct 26 02:37 PM

[Mad Hedge F...:]

plnLast February, I told you I would kill myself if you didn’t buy the world’s largest copper producer, Freeport McMoRan (FCX) (click here for the call at www.madhedgefundtrader... ). OK, I exaggerate. I said I would throw myself in front of a train. Who knows, I might have survived the train. Since you all followed my advice, you are all now as rich as Croesus, as the stock has since gone parabolic, from $15 to $85, up 560%. Providing the rocket fuel for this move was copper’s leap from $1.25 to $3.00. Now that we have broken out through the $3 level in the red metal, the next leg may be in progress. CEO Richard Adkerson is the kind of burly, no nonsense kind of guy you might expect to find in an afterhours bar near one of the many open pits the company works around the world. Although Q3 revenues fell from $4.6 billion to $4.1 billion YOY, FCX has reinstated its dividend, and is clearly back in the catbird seat. China is importing record amounts of copper both for stockpiling and consumption by it explosively growing auto, consumer, infrastructure, and power industries. Record gold prices, which FCX also mines, are giving a further boost. Projects mothballed last year are back on track, and idle equipment is going back to work. When I was at Morgan Stanley during the eighties, any association with the red metal was considered career death, as it was in the grips of a 20 year bear market, trading as low as 60 cents.. The guy who covered our big client in the sector, Anaconda, was nice enough, but people avoided his table in the company cafeteria in the GM building like he had AIDS. I have to pinch myself when I see copper’s performance today. I wonder where that guy is now?

Oct 26 06:19 PM