ETF Plays on Copper

By Michael Johnston, founder of ETF Database.

Investors have rejoiced in the rebound of the U.S. equity markets this year, but the real winners have been those who were bullish on commodities as the markets bottomed.

Hopes of a steady recovery, consistent downward pressure on the dollar, and even strikes at major South American mines have sent prices for metals used in industrial and manufacturing operations skyrocketing in recent months. Copper has been one of the bast performers: the iPath Dow Jones AIG Copper Total Return ETN ( JJC) has gained more than 100% for the year.
iPath DJ-AIG Copper Total Return
CL chart
Source:

But the significant rise in copper prices has been based largely on expectations for increases in demand that are yet to materialize. Global demand has remained weak, and warehouse inventories have been steadily rising as a result. Moreover, demand for new houses, a critical driver of copper demand due to the need for extensive wiring, is showing signs of sustained weakness.

Opinions on where copper will go from here are mixed. Some industry experts believe prices will continue rising through 2011, while others think a downward correction could be just around the corner. Prices have doubled on strong demand from resource-hungry China, but still remain below year-ago levels on relatively weak domestic demand.

"The demand for goods is still very soft; the United States economy is just barely recovering," Allen Sinai, president of Decision Economics, told the New York Times. "In a weak economy where consumer spending is weak, businesses have been slashing left and right. This surprisingly deflationary result reflects that."

ETF Plays On Copper

For investors looking to make a play on copper prices, JJC is one of the best options available. This exchange-traded note is linked to an index composed of futures contracts on the commodity. JJC has an average daily volume of about 100,000 shares and an expense ratio of 0.75%, making it a highly liquid, relatively inexpensive way to gain exposure to copper prices.

In addition to JJC, there are a number of ETFs that offer exposure to copper prices as part of a diversified basket of metals, including:
  • iPath Dow Jones-UBS Industrial Metals ETF (JJM): Invests in copper (44.1%), aluminum (26.8%), zinc (15.5%), and nickel (13.6%).
  • PowerShares DB Base Metals Fund (DBB): Invests in zinc (currently 41%), copper (38%), and aluminum (20.9%), with a base weighting of 33.3% for each metal.
  • Elements Rici Metals Total Return ETN (RJZ): Invests in 10 different precious and industrial metals, including copper.

Michael Johnston is the senior analyst and founder of ETF Database, a Web-based investment resource providing actionable ETF investment ideas and an ETF Screener for investors analyzing potential ETF investments. Johnston oversees ETF Database's free ETF Newsletter, one of the most popular sources for news and commentary focusing exclusively on the exchange-traded fund industry. Johnston also maintains and develops content for ETFdb Pro, a line of analyst reports and model portfolios designed to help investors utilize ETFs to meet their investment goals.

Johnston has completed the Chartered Financial Analyst (CFA) program, and obtained his bachelor's degree in finance from the University of Notre Dame. Prior to founding ETF Database, Michael worked in a private client service group performing valuations of companies operating in a wide range of industries.

More from ETFs

Listen: Here's What You Need To Know About ETFs Today (Hint: They're on Fire!)

Listen: Here's What You Need To Know About ETFs Today (Hint: They're on Fire!)

Bitcoin Today: Bears Rear Their Heads as Prices Continue Downward Spiral

Bitcoin Today: Bears Rear Their Heads as Prices Continue Downward Spiral

Cannabis Stocks Are Screaming Sells After Seeing This Deal: Doug Kass Insider

Cannabis Stocks Are Screaming Sells After Seeing This Deal: Doug Kass Insider

60 Seconds: What's the Difference Between an ETF and a Mutual Fund?

60 Seconds: What's the Difference Between an ETF and a Mutual Fund?

Here's How the Federal Reserve Will Send Stocks Spiraling Lower This Summer

Here's How the Federal Reserve Will Send Stocks Spiraling Lower This Summer