Many commodities have seen a solid start to 2014, as products like
coffee and sugar have crushed the market in the first two months of
the year. However, this commodity boom hasn’t been felt across the
space, as many key resources in the base metal world haven’t seen
any gains to start the year.
In fact, copper is now approaching a double digit loss for the
year, while it is nearing its 52 week low as well. This is despite
a reasonably solid jobs report in the U.S. as well as good
manufacturing data, suggesting that events in China are really
weighing on the red metal now (see China ETF Investing 101).
China in Focus
It hasn’t exactly been smooth sailing for the world’s second
biggest economy lately as concerns over defaults and the banking
system have riled the nation’s markets. Additionally, a broad shift
away from emerging markets hasn’t helped matters either, leading to
some volatile trading in many Chinese securities.
Growth rates in China are also expected to come down, with some
looking for GDP growth to fall below 7% this year. And since China
makes up roughly 40% of global copper demand, this lower growth
rate and lower level of manufacturing activity could reduce demand
for copper, keeping prices depressed in the near term.
"Until the Chinese economy picks up and starts using up the supply
that is out there, I can't see copper trading much higher," said
James Cordier, a principal at Liberty Trading Group for a WSJ
article. "Unfortunately, there are no signs of that happening right
now."
Copper ETFs
With this sluggish backdrop for the top consumer of copper, it
shouldn’t be too surprising to note that a trio of copper ETF
options on the market have been seeing weakness lately, and could
continue to stumble in the weeks ahead. Investors should definitely
monitor these options, as they represent easy ways for the average
investor to tap into the copper market, and could continue to see
volatility in the months ahead should Chinese economic picture
remains cloudy:
iPath Dow Jones UBS Copper ETN (JJC)
This ETN offers investors exposure to front month copper futures
tracking the Dow Jones UBS Copper Index. The note has just under
$90 million under management, while its expense ratio comes in at
75 basis points a year (see all the Industrial Metal ETFs
here).
The product is easily the most popular that is focused on the
futures market, though investors have a few other options to choose
from such as
CUPM. Investors should also note
that, as an ETN, JJC carries with it the credit from of Barclays,
though an ETN will have no tracking error.
JJC crumbled on Friday trading on elevated volume, plunging by 4.1%
on the day.
Global X Copper Miners ETF (COPX)
This ETF represents an equity option for copper investors, tracking
the Solactive Global Copper Miners Index. This benchmark holds 25
stocks in its basket, while it charges investors 65 basis points a
year in fees for the exposure.
Investors should note that the fund has a definite skew towards
smaller securities as large caps account for just one-third of the
total. Meanwhile, American firms make up just 5% of assets, leaving
a third for Canada, 14% for Australia, and 11% for the UK.
COPX tumbled by about 3.2% on Friday trading, slumping along with
its underlying metal (see all the Materials ETFs here).
First Trust ISE Global Copper Index Fund (CU)
This copper mining ETF follows the ISE Global Copper Index for
exposure, tracking 25 companies across the globe. The fund uses an
equal weight methodology, giving roughly the same weights to each
security in the portfolio, while it charges investors 70 basis
points a year in fees for the exposure.
Large caps make up roughly 40% of assets in this fund, followed by
about one-third in mid cap stocks. U.S. copper miners make up just
7% of assets, while Canada (32%) and the UK (20%) dominate from a
country look.
This ETF fell about 3.5% in Friday trading, a relatively big loss
compared to the S&P 500’s flat performance for the session.
Bottom Line
It doesn’t really seem to matter how the economy is doing in the
U.S. for copper, as the jobs report was decent, while the recent
manufacturing data has been solid. Instead, copper is trading off
of Chinese news and the outlook for the economy in that nation (see
China ETFs Tumble to Start 2014).
And unfortunately for copper investors, that outlook doesn’t appear
to be very robust as growth expectations are falling, and concerns
over debt are building. A turnaround will definitely be needed here
before gains can come back to copper, so until then, it may be best
to stay on the sidelines instead of jumping into any of the
aforementioned copper-focused ETFs.
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GLBL-X COPPER (COPX): ETF Research Reports
FT-ISE GLBL COP (CU): ETF Research Reports
IPATH-DJ-A COPR (JJC): ETF Research Reports
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