Will There Be A Physically-Backed Copper ETF?

 |  Includes: CUPM, JJC
by: Tom Lydon

In the highly controversial and anticipated launch of the first physically-backed copper exchange traded fund, the U.S. Securities and Exchange commission is extending the consultation period for the new copper ETF offering.

After opposition escalated in the week ahead of last Thursday's ruling deadline, SEC regulators asked JP Morgan Chase, the company that has filed for the new JPM XF Physical Copper Trust, along with copper fabricators and hedge funds who oppose the creation, to weigh the merits of such a physically-backed copper ETF, reports Josephine Mason for Reuters.

Earlier last week, U.S. Senator Carl Levin also argued that the copper ETF would cause a boost-and-bust cycle in the copper market and "disrupt the global supply of copper." Traditional industrial consumers use copper as a basic input, such as in wiring, whereas banks are seeking to attract retail customers in the hopes of potentially capitalizing on copper prices.

The physically-backed copper ETF would issue shares that are equivalent to a set value of copper that is physically stored in vaults, making copper accessible to everyone as an investment class. However, the opposition points to the impact on traditional end users as the proposed ETFs would have to hoard 180,000 tons of copper; the JPMorgan fund would hold about 62,000 metric tons, while the potential BlackRock ETF would stash away 121,200 metric tons. While the numbers appear insignificant compared to the 20 million metric ton global copper market, U.S. fabricators are worried because the copper required will come out of U.S. markets. According to a letter from major hedge funds, according to Reuters:

The risks associated with the removal of so much copper could have potentially devastating effects not just on potential investors in the shares, which should be a concern to the SEC, but also on existing and future investors in industries that depend on copper for their primary feedstock.

The NYSE Arca exchange has argued that concerns are "speculative and misplaced," given the size of the funds. The SEC has not stated on when it will make an official ruling; however, its decision will also affect the outcome of other similar funds filed.

Currently, the only copper-based fund products available hold futures contracts, including the iPath Pure Beta Copper ETN (NYSEARCA:CUPM) and the iPath Dow Jones UBS-Copper Total Return ETN (NYSEARCA:JJC). Additionally, it should be noted that the two are exchange traded notes, which are unsecured debt obligations issued by banks and subject to the bank's credit risk.

Max Chen contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.