With the U.S. dollar plummeting, resource-hungry emerging markets racing ahead, and concerns over inflation beginning to pop up, hard assets have been red hot. And ETF issuers are seemingly taking notice, coming up with creative ways to offer investors exposure to natural resources. Just days after JPMorgan filed papers with the SEC detailing plans for a physically-backed copper ETF, iShares has followed suit. The company recently filed papers for the iShares Copper Trust, which would invest in physical copper to be stored in warehouses in the U.S. and potentially other locations around the globe. The Bank of New York Mellon was named as the trustee of the proposed trust while Metro International Trade Services LLC would serve as the custodian.
Currently, the only physically-backed commodity products available to U.S. investors focus on precious metals, including gold, silver, platinum, and palladium. iShares offers the second-largest gold ETF (IAU) and largest silver ETF (SLV), which have aggregate assets of approximately $12 billion. As some investors have expressed frustration with the nature of returns delivered by commodity ETFs implementing futures-based strategies, ETF issuers around the globe have taken steps to devise “contango-free” alternatives. Funds that offer exposure to natural resources by physically buying and holding the underlying commodity will generally be immune to the slope of the futures curve, but may incur considerable costs related to warehouse storage.
Across the pond in Europe, ETF Securities is reportedly close to launching a line of funds that physically hold copper, aluminum, zinc, nickel, lead and tin, as well as a basket of all six major base metals. And rumors of U.S.-listed funds that would hold physical metals have been swirling in recent months before JPMorgan formalized plans for such a product in its recent SEC filing [see JP Morgan Plans Physically-Backed Copper ETF].
The development of physically-backed funds holding industrial metals seems likely to draw increased scrutiny to the ETF industry once again. If demand for these products is strong–a very real possibility given tremendous investor interest in hard assets–the percentage of global stocks held as investments could soar. That could reduce inventories available to industrial users of the commodities, potentially adding upward pressure to prices [see Are Physically-Backed Metal ETFs A Bad Idea?].
When ETF Securities was preparing to launch its physically-backed platinum (PPLT) and palladium (PALL) ETFs at the beginning of this year, the regulatory agencies took a long look at the impact of the products before ultimately granting approval. At the time, some producers of the metals expressed concern that widely-available investment products would result in “hoarding,” which would drive up prices in the short term but curtail demand over the long run as users sought out cheaper alternatives [see The Many Uses Of Commodity ETFs].
Although the value of bullion held by gold ETFs is north of $50 billion–making these funds among the largest holders in the world–there has been little discussion about the potential impact of these products on market prices since the precious metal has few industrial applications. But copper is a key material used in a wide variety of businesses, including wire and cable for the homebuilding and electronics industries. So the impact of any copper hoarding could ripple throughout the economy, making physically-backed investment products a potentially tricky issue for the SEC and other agencies to address [also read Three ETFs To Watch As The Housing Market Crumbles].
The copper ETFs from JPMorgan and iShares are still in the early stages, and no launches are imminent. Coming months should shed some additional light on the regulatory environment and appetite for these products.
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Disclosure: No positions at time of writing, photo is courtesy of Daniel Schwen.