Physically-Backed Aluminum ETF Ahead

by on September 21, 2009 | ETFs Mentioned:

While the ETF industry as a whole continues to experience tremendous growth, exchange-traded commodity products are particularly hot. Upcoming regulations expected to limit the ability of funds to invest in futures contracts have made investors cautious of funds that rely on these products to track commodity prices, but demand for physically-backed commodity products is at an all-time high.

Aluminum ETFIn the last month, we’ve seen London-based ETF Securities make a splash in the U.S., launching two funds that already have nearly $200 million in combined AUM. After SIVR cracked the $100 million mark in its first month, SGOL has amassed more than $70 million in its first two weeks.

Inflows into gold ETFs have surged in recent months as the price of the precious metal broke through the psychologically important $1,000 mark and investors flocked to safe havens. And industry insiders expect the inflows to continue for the foreseeable future (see our Guide to Gold ETFs for a complete look at all the ETF options available) .

Now the world’s largest commodity trader and one of the largest financial institutions are looking to launch a physically-backed aluminum ETF. Glencore International and Credit Suisse are reportedly teaming up to launch a fund, although neither an ETF provider nor regulatory approval has been obtained yet. Glencore is believed to have accumulated some 1 million tonnes of physical aluminum this year, so the creation of an ETF would allow the firm to release some of its inventory to investors.

At present, U.S. investors are able to gain exposure to aluminum prices through a number of diversified metals ETFs, as well as the iPath Dow Jones-AIG Aluminum Total Return Sub-Index ETN (JJU). But none of these exchange-traded products physically hold aluminum, instead offering exposure through futures contracts or an ETN structure. Against a backdrop of increasingly stringent U.S. regulation, physical storage of commodities is an important attribute in the minds of many investors.

Aluminum prices have shown strength recently as signs that the worst of the recession has passed sparks hopes of increased manufacturing activity around the globe. Aluminum, the most abundant metal in the earth’s crust, has a remarkable ability to resist corrosion and very low density, making it useful in the aerospace, transportation, and building industries.

But some analysts believe weak fundamentals and a speculation-driven market will drive down prices in coming months. Others estimate that the end of the popular “Cash for Clunkers” program will put downward pressure on aluminum prices. According a a recent Purchasing business survey, 85% of buyers expect aluminum prices to increase or remain stable over the final quarter of the year.


The launch of a physically-backed aluminum fund is still a ways off, but the heightened interest in these products could be a trend that continues in coming months. Canada’s ScotiaMocatta recently launched the world’s first physically-backed copper product. If strong inflows continue into these funds, expect more issuers to join into the game.

Disclosure: No positions at time of writing.