In my previous posts here and here, I have analyzed the fundamental parameters of copper -- demand, supply and reserves -- and recommended investing in this important metal with a long-term perspective. In this article, I will compare the different ways to invest in copper:
- Copper futures contracts
- Copper ETN
- Shares of copper companies
(click images to enlarge)
Data: TradeStation Group, Inc. Chart: Arie Goren
Data: TradeStation Group, Inc., U.S. Bureau of Labor Statistics Chart: Arie Goren
First, let us compare the historical return of the different investment instruments. The table below presents the historical price appreciation and the Compound Annual Growth Rate - CAGR, between January 31, 1996 and September 07, 2012, for the following investing instruments: copper continuous leading future contract; copper continuous futures contract adjusted for rollover of the expiring contract; and the stocks of these companies, which also consider the dividend distribution: Freeport-McMoRan Copper & Gold (FCX) and Southern Copper Corp. (SCCO). Copper ETN did not yet exist in 1996, so this calculation does not take them into account. The adjusted for dividends stock prices were extracted from Yahoo Finance, and the data for the continuous contracts were taken from TradeStation Group, Inc.:
On that period, holding shares of Southern Copper Corp. has given tremendous profit, 3,333% or 23.73% annually. Holding shares of Freeport-McMoRan Copper & Gold has given a return of 268.2% or 8.17% annually, better than the return of holding copper futures contracts. The appreciation of the unadjusted futures contract was 217.5% or 7.21% annually, but because long term investors in futures contracts should roll over expiring contracts, and due to the contago effect, the return was little less 211.1% or 7.07% annually, without taking in account trade commissions (a comprehensive explanation about the influence of contango and backwardation on long-term investment in commodities can be found in my article here).
In order to include the copper ETN iPath DJ-UBS Copper TR Sub-Idx ETN (JJC), which was launched on October 2007, an identical study was performed on a much shorter period, from October 31, 2007 to September 07, 2012. The results are shown in the table below:
In that period, the return of the adjusted continuous futures contract was 4.8% or 0.97% annually, but the return of copper companies and copper ETN was negative. The return of iPath DJ-UBS Copper TR Sub-Idx ETN was less than the adjusted futures contract because of the note's expenses and liabilities. Freeport-McMoRan Copper & Gold suffered a loss of 27.3% during this period and Southern Copper Corp. lost 4.0%.
Holding Southern Copper Corp. shares since 1996 has been very profitable, but holding the company shares since October 2007 has given a loss. Holding Freeport-McMoRan Copper & Gold shares since 1996 has been also more profitable than holding copper continuous futures contract, but has given a loss since October 2007. The holding of iPath DJ-UBS Copper TR Sub-Idx ETN since its launch on October 2007 has given a loss, although the copper price has risen during this period.
As a conclusion, I think that for long term investment, it is better to buy shares of these two copper companies: FCX and SCCO. For short term investment, copper futures contracts are a better choice.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FCX over the next 72 hours.