Commodities finally snapped out the five-year bear market in 2016, outperforming equities with industrial metals topping the list. The bullish trend is likely to continue this year given the recovering macro fundamentals, tight supply conditions, rising global demand and recovering oil prices though the strength in U.S. dollar and the prospect of rate hikes will weigh on commodities.
Improving conditions in China, the world's largest consumer of raw materials, and Trump's euphoria will act as the biggest catalysts to the metals.
A slew of recent data suggests that economic activity has picked up strongly in China with December producer prices rising at their fastest pace in more than five years and manufacturing activity expanding at the quickest pace in nearly four years. Additionally, strong Chinese demand from infrastructure and construction projects will continue to drive industrial metals higher given that about half of the world's demand for industrial metal comes from China.
As Trump plans to bring back production to the U.S. and pledges to increase infrastructure spending, the industrial sector will definitely get a boost from his administration and the resultant higher prices for the metals. Added to the bullish scenario is the massive infrastructure investment in India by the government that would raise demand for metals.
Further, supply shortfalls or capacity cuts will drive metal prices higher. In this regard, the latest development has been made again by China which vowed to further cut steel and coal production that has been a source of trade friction with many countries.
Given the current encouraging fundamentals, investors may want to consider cycling into the industrial metal space to obtain a nice momentum play as we move ahead into the New Year. While betting on individual metal is certainly an option, a broad play on industrial metals could be a better option as it diversifies the portfolio and lowers the risk. All these funds have a Zacks ETF Rank of 3 or 'Hold' rating.
PowerShares DB Base Metals Fund (NYSEARCA:DBB)
This product seeks to track the DBIQ Optimum Yield Industrial Metals Index Excess Return, which is a rules-based index consisting of futures contracts on some of the most heavily traded base metals commodities in the world. Currently, zinc futures contracts account for 34.2%, followed by aluminum (31.7%) and copper (13.6%). The ETF has amassed $284.1 million in its asset base and trades in average daily volume of more than 312,000 shares. It charges 82 bps in annual fees and has gained about 40% over the past one year.
iPath Bloomberg Industrial Metals Subindex Total Return ETN (NYSEARCA:JJM)
This note tracks the Bloomberg Industrial Metals Subindex Total Return, which delivers returns through an unleveraged investment in the four futures contracts on industrial metals. Copper futures contracts make up for the highest 42.7% allocation while aluminum, zinc and nickel account for 24%, 19.6% and 13.7%, respectively. The ETN has been able to manage assets worth $7.6 million while volume is extremely light at 4,000 shares. It has an expense ratio of 0.75% and returned about 36% over the past one year.
ELEMENTS Linked to the Rogers International Commodity Index - Metals Total Return (NYSEARCA:RJZ)
This ETN provides convenient access to markets and strategies that may not be readily available to individual investors. The return on these securities in linked to the performance of the Rogers International Commodity Index Metals Total Return, which comprises 11 commodities. The note charges 75 bps in annual fees and trades in volume of 15,000 shares a day on average. It has AUM of $12 million and added 26.6% over the past year.
ETRACS CMCI Industrial Metals Total Return ETN (NYSEARCA:UBM)
This ETN provides exposure to the portfolio of commodity futures through a single investment by tracking the UBS Bloomberg CMCI Industrial Metals Index Total Return. The benchmark seeks to deliver returns from a basket of six futures contracts representing the industrial metals sector. The commodity futures contracts are diversified across five constant maturities ranging from three months to three years. In terms of holdings, big chunks of the assets are tied to copper and aluminum as these collectively account for 59.8% of the basket. High-grade copper (13.7%), nickel (11%), zinc (9.9%), and lead (5.6%) round off to the rest of the portfolio.
The product is less popular and illiquid with AUM of just $2.4 million and average daily volume of about 1,000 shares. The ETN charges 65 bps in fees per year from investors and gained nearly 29% in the trailing one-month year.
The recent trends have been encouraging for the industrial metals. A good reason for the surge is impressive data that we have seen lately on the industrial production and manufacturing fronts globally.