The rise of the ETF industry has helped to establish commodities as the “fourth asset class,” making investments in natural resources available to more investors than ever before. Commodity exchange-traded products have attracted almost $29 billion in cash through the first 11 months of 2009, making this space one of the main drivers of growth in the ETF industry. While the most popular commodity ETFs have traditionally focused on safe havens (such as gold) and inflation hedges (such as oil), copper has become a popular investment as well.
Copper is one of the most abundant metals in the world, with millions of years worth of supplies trapped in the earth’s crust. The vast majority of these reserves, however, is unattainable with current technologies, and most estimates of current usable reserves fall between 25 and 50 years.
Copper is perhaps best known for its use in U.S. currency, but is also used in a wide variety of consumer and industrial products. Circuit boards, wiring, roofing materials, and countless other electronics and medical applications all include various amounts of copper. Major producers of copper include Chile, the U.S., Indonesia, and Peru.
As a relatively common metal, copper generally trades at only a fraction of the price of precious metals such as gold and silver. But because of some complex drivers of supply and demand for copper, prices can be quite volatile. After trading for as little as $0.60 per pound in 1999, copper enjoyed a seven year bull market, rising to about $3.75 per pound by early 2006. After sinking during the economic downturn, copper recovered to well above $3.00 per pound in late 2009.
Copper prices are impacted by a number of factors, including supply issues, housing markets, and demand from emerging markets:
- Given its presence in countless electronics products and other industrial goods, demand for copper depends on the health of the U.S. and international manufacturing sectors. When factories idle or cur shifts, inventories tend to rise significantly, pushing prices down.
- Significant portions of the world’s copper supplies come from the South American markets of Peru and Chile, which can be subject to political turmoil from time to time. Strikes are a fairly common occurrence, and can have a major impact on output levels for extended periods of time.
- Copper is used extensively in new homes, from wiring throughout houses to the roofing materials overhead to doorknobs and other miscellaneous fixtures. As such, demand for copper is tied to the market for new homes, and can be impacted significantly by downturns in the housing market.
- In recent years, copper consumption in China and India has surged, and these nations now account for a significant portion of world demand. While increased usage in the industrial sectors of these economies has given support to copper prices in recent years, it also makes copper prices vulnerable to manufacturing downturns in these markets.
Leveraged Recovery Play
While investors in most domestic and international equity ETFs saw solid returns in 2009, the real winners were those who had invested in commodities, particularly industrial metals. As the recession ended in much of the world and expectations for a robust recovery began to take form, prices of raw material used in many manufacturing applications began a steady upswing. Copper, aluminum, steel, and other industrial metals delivered huge gains, erasing many of the steep losses incurred throughout the downturn.
Copper ETF Options
The only pure play copper exchange-traded product available to U.S. investors is structured as an exchange-traded note (ETN), meaning that it doesn’t invest in the physical metal or even futures contracts based on copper, but is a senior, unsecured debt instrument. The return of the iPath Dow Jones-UBS Copper Subindex Total Return ETN (JJC) is linked to an index that reflects returns available to investors through an investment in futures contracts on copper (specifically, the High Grade Copper futures contract traded on the COMEX).
In addition to JJC, there are a number of ETFs that offer exposure to copper as part of a diversified basket of industrial metals, including:
- iPath Dow Jones-UBS Industrial Metals ETF (JJM): Invests in copper (45%), aluminum (27%), zinc (17%), and nickel (11%) [see holdings of JJM here].
- PowerShares DB Base Metals Fund (DBB): Invests in zinc (currently 34%), copper (33%), and aluminum (33%), with a base weighting of 33.3% for each metal [see charts of DBB here].
- ELEMENTS RICI Metals Total Return ETN (RJZ): Invests in ten different precious and industrial metals, including copper [see technical analysis of RJZ here].
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Disclosure: No positions at time of writing.
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