Comparing Copper Mining ETFs Head-To-Head

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By Eric Dutram

The weak economy in the second half of 2011 wasn’t exactly welcomed news for those in the copper industry. Prices for the red metal slumped from just under $4.5/lb. in late July to just over $3.0/lb. in early Autumn. Yet, thanks to some encouraging data on the housing front, as well as hopes for a soft landing in China—or more construction related stimulus in the nation—copper prices have come storming back in recent months, pushing prices back up close to the key $4/lb. level to start the year.

While obviously this has been good news for those who are holding onto copper ETNs such as JJC—prices of this note have gained close to 21% in the past three months—copper mining equities have also been huge beneficiaries as well. Most securities in this space have seen double digit gains as well, spurred by the prospect of higher profit margins and increased demand for copper if the economy continues to rebound. Thanks to this, a closer look at some of the copper mining ETFs could be an intriguing investment for those seeking to gain exposure to the sector but do not have a strong opinion on any particular stock in the industry (read Time To Consider The Silver Miners ETF).

For these investors, there are currently two options available; the First Trust ISE Global Copper Index Fund (NASDAQ:CU) and the Global X Copper Miners ETF (NYSEARCA:COPX). Both of these funds could represent a cost effective way to gain diversified exposure to the broad sector while limiting the holdings in firms that do a great deal of business in the other corners of the mining world (also read Is HAP The Best Commodity Producer ETF?). However, while they may appear to be similar at first glance, the funds actually have some key differences that investors should be aware of before making their decision. Below, we highlight COPX and CU in greater detail and discuss some of the key similarities and distinctions between the two.

ISE Global Copper Index Fund (CU)

CU tracks the ISE Global Copper Index, which is designed to give investors access to firms that are active in the copper mining industry be it in refining, exploration, or mining. Interestingly, the fund doesn’t use a pure market cap weighted system to assign values to component securities. Instead, the product uses a modified linear weighted methodology adjusted by revenue exposure to copper production, where component securities are grouped into linearly weighted quartiles and then equally weighted within each quartile. The resulting distribution allows smaller, more copper focused companies to be adequately represented in the index. This also produces a fund that charges 70 basis points a year in fees and one that has 26 stocks in its basket.

In terms of holdings, only three countries make up more than 11% of assets with Canada (42.8%) the UK (20.8%) combining to make up more than three-fifths of assets and American firms taking up another tenth. For individual securities, First Quantum Minerals [TSE:FM] takes the top spot, but it closely trailed by Rio Tinto (NYSE:RIO) and Southern Copper (NYSE:SCCO). Investors should also note that every security in the top ten receives at least 4.3% of total assets suggesting a pretty good breakdown among securities. Performance figures have been more encouraging as of late as CU has gained 15.4% in the past months alone. This combined with the product’s solid dividend payout, the low P/E below 9, and the improving sentiment in the industry, could make the fund a star performer later this year.

Global X Copper Miners ETF (COPX)

COPX follows a similar benchmark as its First Trust counterpart, tracking the Solactive Global Copper Miners Index. This benchmark looks to select companies globally that are actively engaged in some aspect of the copper mining industry, be it in mining, refining, or exploration. This gives the fund roughly 32 stocks in total while charging investors 65 basis points a year in fees (see Top Three Precious Metal Mining ETFs).

Top individual holdings contain three Canadian-based firms including; Quadra FNX Mining (OTC:QADMF), Lundin Mining (OTCPK:LUNMF), and First Quantum Minerals, all of which make up at least 5.5% of total assets. Given this focus on Canada in the top spots, it shouldn’t come as much of a surprise that Canada makes up nearly half of total assets, while this is followed by a nearly 20% weighting to the UK, and a 10.5% allocation to the USA. In terms of capital appreciation, COPX has outperformed CU over the past one month period gaining about 16.7% in that time. However, the fund has also led CU lower on the downside, suggesting that greater volatility could be inherent in this product from Global X. With that being said, this product also has a P/E below 9 and a dividend above 2.25% so there is some value in the underlying securities in this fund too.

LUNMF: Free stock analysis report

RIO: Free stock analysis report

SCCO: Free stock analysis report