CPER: A Better Copper ETF? - Commodity ETFs
November 21 2011 - 6:23AM
Zacks
Precious metals have taken off so far this year both in terms of
popularity and performance. Investors have scooped up ETFs that
target products such as gold and silver while also dipping their
toes into platinum and palladium-based funds as well. While these
metals have stolen the show, many are also beginning to take a
closer look at the group’s industrial-focused cousins as well for
investment. Copper, for example, is far more useful in everyday
applications than many precious metals, as the red metal finds its
way into a number of products ranging from electrical wiring to
plumbing and roofing. This ensures that copper remains a good proxy
for global economy growth and that the metal will remain an
important product for decades to come.
In light of this, many investors have looked towards the
exchange traded market for options in the space. As of late, the
options were minimal to say the least as only two funds offered
direct, exclusive exposure to the metal. The dominant player in the
space is the iPath Dow Jones AIG Copper Total Return Sub-Index ETN
(JJC) which has just over $130 million in assets. The fund tracks a
single futures contract in copper, giving investors direct exposure
to the important metal while simultaneously collateralizing the
investment with a purchase of short-term U.S. Treasury debt. The
only other product in the space is the upstart from iPath, the Pure
Beta Copper ETN (CUPM) which debuted in April of this year. The
fund has so far failed to capture assets despite its relatively
interesting methodology which seeks to roll into one of a number of
futures contracts with varying expiration dates, as selected using
the Barclays Capital Pure Beta Series 2 Methodology.
Beyond these two ETNs, however, options have been hard to come
by. A physically-backed option, much like we have in the precious
metals market, still eludes investors thanks to the low mass-value
ratio inherent in copper. This low ratio, which makes copper worth
but a fraction of its precious metal cousins, makes the cost of
storing the metal in warehouses prohibitive to issuers, at least at
the current juncture. Nevertheless, innovation still abounds in the
space with the recent release of the first copper ETF, the United
States Copper Index Fund (CPER).
This brand new fund seeks to reflect the daily changes in
percentage terms of the Copper Index, less CPER’s expenses. This
benchmark is designed to reflect the performance of the investment
returns from a portfolio of copper futures contracts fully
collateralized with 3-month U.S. Treasury Bills. Currently,
exposure is spread across three different maturities with assets
going towards March, April, and December 2012 contracts. However,
fees are a little higher than the other copper funds with expenses
coming in at 0.95% compared to 0.75% for both of the other
products.
Key Differences
Beyond the expense differential, the methodologies may sound
similar but there are actually a number of key differences that
investors should be aware of. First, and arguably the most
important difference, is that CPER is an ETF and not an ETN. This
means that while CPER has tracking error and can potentially
deviate from its benchmark, the fund does not have any credit risk,
unlike its ETN counterparts. Furthermore, CPER also holds more
contracts than either of the more established funds in the space,
spreading exposure across the curve in a way that both CUPM and JJC
do not. However, the downside is that CPER, thanks to this
structure, is treated as a partnership for U.S. tax purposes. This
means that investors will have to file a K-1 come tax time and they
may also see differences in terms of both long and short term
capital gains rates, but obviously this will depend on an
individual investor’s situation.
Which To Pick?
Each of the copper products available to investors has their own
pros and cons that must be evaluated before making a purchase.
While CPER is more expensive than its counterparts, its more varied
exposure, coupled with its ETF structure, may be appealing to some
investors. On the other hand, the minor tax hassle of filing out
the K-1, along with the 20 extra basis points in expenses, could be
enough to push some cost-conscious investors to the ETNs, it really
depends on the individual situation.
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