Aluminum Expected To Rise >8% 2016 - The ETFs You Need

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Includes: AGG, FOIL, JJU, SPY
by: FX Metrix, LLC

Summary

Aluminum prices are expected to rise >8% from current spot prices according to median analyst estimates.

We analyze the expected upside, as well as the variations in analyst estimates.

Additionally, we analyze the two existing aluminum ETFs to help investors gain exposure without a futures account.

Assuming one aluminum ETF is the same as another could be a costly mistake!

Introduction

According to data gathered from Bloomberg, aluminum prices are expected to rise though 2016. As we move through the year, investors looking to diversify out of equity positions and into less correlated markets may look towards aluminum exposure as a small portion of their portfolio.

We decided to analyze the projections for aluminum prices in 2016, as well as analyze a few different ETFs to use for those looking to gain exposure to aluminum without stepping into the derivatives markets.

Quarterly Price Forecasts

As seen below in the Bloomberg terminal screenshot, the Q4 2016 median estimate for aluminum prices is $1642 (USD/Metric Ton). The mean estimate for Q4 2016 aluminum prices is $1615/MT. Based on a the shown spot price of $1511/MT, there is a roughly 8.67% upside in aluminum prices by year end if prices reach the median estimate.
Since outlooks within the commodity markets can change all the time, we decided to especially focus on the most recently updated analyst forecasts for aluminum prices in 2016.

The three firms that updated aluminum price forecasts on February 5th, 2016 are:

These three price estimates happen to come in lower than the median or the mean with a median of $1550/MT and a mean of $1533.33/MT. While this median only offers a roughly 2.58% rise vs. current spot price, there are many analysts that actually believe the Q4 2016 prices will be far higher. Danske Bank (OTCPK:DNKEY) analyst Jens Pederson on 01/26/16 updated his estimates for Q4 2016 to reflect an expected rise of over 12.50% to 1700.

Less Correlated to Stocks and Bonds
As mentioned in the introduction, those looking to diversify their portfolios in 2016, aluminum exposure may be one option. As aluminum tends to have a fairly low correlation to both stocks and bonds, this metal may be a path to portfolio stability.

Below is a charts showing the correlation between aluminum, as represented by the iPath Bloomberg Aluminum Total Return Subindex ETN (NYSEARCA:JJU) and the S&P 500 (NYSEARCA:SPY). Additionally, we included a chart showing the correlation between JJU and U.S. Treasuries as represented by the iShares Core U.S. Aggregate Bond ETF (NYSEARCA:AGG).

Fundamental Chart Chart

Gain Exposure to Aluminum Using ETFs

For investors who want to get involved with aluminum action without starting a futures account, they can turn to ETFs. When it comes to aluminum ETFs, not all are created equal. While there is one significant thing in common with these two funds, the differences are all too often overlooked. Assuming one aluminum ETF is the same as another is a foolish mistake that could be costly over time. While both of these ETFs are offered by Barclay's (NYSE:BCS) iPath, they are not the same fund at all!

  1. iPath Bloomberg Aluminum Subindex Total Return ETN
  2. iPath Pure Beta Aluminum ETN (NYSEARCA:FOIL)

JJU Chart

JJU and FOIL both seek to give investors exposure to aluminum and yet the devil is in the details. As shown above, the two funds have had similar yet varying performances over the course of 2016 so far. FOIL is down only 0.23% while JJU is down 3.48%.

As we dig through the details of these two funds, we hope to help investors better determine which is the best method for them to get aluminum exposure.

Side-By-Side JJU vs. FOIL Comparison

Ticker

JJU

FOIL

Price (Open 2/18)

$13.11

$21.78

AUM

$2.06 M

$1.22 M

Expense Ratio

0.75%

0.85%

Structure

ETN

ETN

Average Daily Volume

$5.97 K

$1.41 K

Average Bid-Ask Spread

2.25%

0.71%

Lowest Expense Ratio
For the aluminum investors with a longer-term investment outlook, the slightly higher expense ratios of FOIL at 0.85% of AUM annually can shave away from potential gains. Those investors should be considering JJU as a means of gaining exposure to aluminum with a lower expense ratio of 0.75%.

Lowest Bid-Ask Spread
For the aluminum ETF investors who tend to change their mind on trades often, or for those who just happen to be active traders in general, look to the ETF with the lowest bid-ask spread. In this measure, we believe that the choice is clear for active traders: FOIL. With the lowest average bid-ask spread of 0.71%, it is by far the lowest ETF in terms of transaction costs (commissions held constant). JJU on the other hand has an average bid-ask spread of 2.25%. Unfortunately, for those traders really looking to cut transaction costs on their aluminum ETF trades, there are currently none available for commission free trading regardless of your broker.

Highest Volume
JJU is the fund with the most liquidity in terms of average volume (in $ to normalize comparisons). This is believable as it is the larger of the two funds by AUM. JJU is therefore the fund of choice for traders looking to move in and out of the aluminum ETF market with measurable size. It should be noted that trading big in either of the other funds could make waves and chase the price up quickly. As shown in the chart below, there are some days where neither of the ETFs trade at all.

JJU Volume Chart

Counterparty Risk of ETNs
Since an ETN is essentially an exchange traded debt instrument, there is counterparty risk involved. Since the counterparty for both of the aluminum ETNs is Barclays Bank Plc. (the issuer of iPath ETNs), this means that there is limited counterparty risk down the line, as Barclays is viewed as a stable financial institution.

Two Different iPath Offerings?
As you may have noticed in the list or table above, both of the offerings are issued by iPath/Barclays. They both have an ETN structure, and both hold aluminum futures to track the returns. JJU uses a front month futures strategy to keep it constantly in line with aluminum prices. FOIL on the other hand tries to limit contango risk by spreading the position out across a longer time horizon of expiration dates rather than just front or near month futures like the other fund.

Share Price
Last but not least, we wanted to mention share price because this comes into consideration for smaller traders/investors with limited capital trying to trade in round lots. When it comes to share price, smaller traders can look towards JJU which both currently trade below $15 per share. Just be sure to check the premium/discount to NAV that the funds are trading at before timing an investment.

Conclusion

Whether you side with Danske Bank at the high end of the forecast range, or with Societe Generale at the low end of the forecast range, it seems like all analysts agree that aluminum prices will be on the rise as we move through 2016.

Additionally, we have shown that aluminum is a great method of reducing portfolio correlation as it has little to no correlation with the S&P 500 or the Barclays Aggregate U.S. Bond Index.

In order to get involved in the expected aluminum price change without opening a derivatives account, we recommend ETFs as the best method. We hope this comparison was a useful and comprehensive guide to investing in aluminum ETFs. We look forward to keeping investors informed on any new developments as we see them. Be sure to check out our similar articles on physically backed gold ETFs, physically backed silver ETFs, and platinum ETFs.

References

J. Pederson Further Info

JJU ETF Profile

JJU ETF Website

FOIL ETF Profile

FOIL ETF Website

IYM ETF Profile

IYM ETF Website

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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