by Tony Daltorio
The history of copper and its two main alloys, bronze and brass, is basically a chapter by chapter story of humankind’s progress from the Stone Age to the present. It was the first metal used in any quantity by people, thanks to it being very ductile, malleable and resistant to corrosion. In modern times, these characteristics, along with copper’s ability to conduct heat and electricity, continue to make it among the most used metals. That the red commodity is at the heart of so many industrial applications is the reason why analysts offer refer to it as “Dr. Copper,” with a Ph.D. in economics.
Investors interested in knowing the strength of the global economy usually need look no further than the price of copper. The easiest way for most equity investors to follow or participate in the copper market is through the use of exchange-traded funds and notes. Two of the most popular copper-related ETFs and ETNs are the First Trust ISE Global Copper Index Fund (CU) and the iPath Dow Jones-UBS Copper Subindex Total Return ETN (JJC).
There is quite a difference between the two. The CU currently holds a portfolio of 27 stocks involved in the mining of copper and other metals. The ETF has net assets of approximately $39.82 million and an average daily trading volume of roughly 16,100 shares. Some of the large mining companies contained in the fund’s portfolio are Rio Tinto (RIO), Freeport-McMoran Copper & Gold (FCX) and Southern Copper (SCCO). The index components are reviewed quarterly.
On the other hand, the JJC is designed to track the performance of copper futures traded on the COMEX. It has net assets of approximately $112.5 million and an average daily trading volume of about 73,530 shares. It is also a debt obligation of the issuer, Barclays Bank.
What may be of most interest to investors is whether they would have made more money in 2012 by investing in a basket of copper mining companies, or by investing into an instrument that offers them a play on the price of copper itself. The answer -- perhaps surprising to some -- is below.
iPath Dow Jones UBS Copper Subindex Total Return ETN (JJC): 7.24%
Based on copper futures, this ETN returned 7.24% so far in 2012 (the index on which it is based returned 8.36%). The correlation with the S&P 500 index is still relatively high at 0.64, but it has been higher in the past. JJC’s performance is also highly correlated with that of emerging markets (0.69), which are big users of the red metal. China, for example, is the world’s largest user of refined copper.
First Trust ISE Global Copper Index Fund (CU): -0.61%
This ETF is barely down for the year (-0.61%) and its return just turned positive over the past month as sentiment improved towards commodities, thanks to the introduction of the Federal Reserve’s QE3 program. Investors believe QE3 and other stimulus measures undertaken by Europe, Japan, China and elsewhere will stoke faster economic growth and therefore, demand for copper.
Its performance far lagged that of the S&P 500 index -- which has gained about 15% so far in 2012 -- and also that of the metal itself, as evidenced by the return garnered by holders of JJC. Why the underperformance of CU so far this year? At least prior to the launch of QE3, traders in the equity markets were rather negative on the future outlook for growth in copper demand. Their concerns focused on the Chinese economy, which is slowing. The only questions are by how much and for how long.
Disclosure: No positions at time of writing.