Commodities: Industrial Metals
There are currently six industrial metals products on the market, but only one (DBB) has managed to attracted a decent following. Of the roughly $200M invested in the segment, 90% of that
“DBB's accessibility advantage over all competing funds is impossible to ignore” is in shares of DBB alone. That makes it far and away the most liquid option and gives it an accessibility advantage over all the competing funds that's simply impossible to ignore. For this reason, DBB earns Analyst Pick despite sub-optimal exposure in Fit.
Of course, investors have many considerations that go beyond accessibility, and the structure of a product matters. DBB is the only commodities pool in the segment, so if you are averse to receiving a K-1 at year-end, you will want to consider the other five choices in the segment, all of which are listed as ETNs.
Given that none of the ETNs is particularly liquid, exposure would likely be the determining factor in choosing between them. UBM is the only fund that exclusively tracks all five of the metals in our benchmark: zinc, copper, lead, nickel and aluminum. On the other end is BDG which, like segment leader DBB, equally weights just 3 of the 6 base metals: copper, zinc and aluminum.
Not only does each product cover a different range of metals, the contracts each fund tracks also vary. Some products like JJM track only front-month futures contracts; others like BDG track the contract believed to be least impacted by contango. Finally, UBM holds as many as five different contracts on each metal to suppress contract decay.
Once you've decided which structure you need, your work is cut out for you in trading. The silver lining is none of the ETNs stands out from another in terms of liquidity or cost, so your most important decision will be exposure. (Insight updated 03/28/17)
All Funds (5)
DBB $288.73 M 288730749.37276 Easiest, cheapest to trade
HEVY $518.8 K 518796.5527 High closure risk, hard to trade
JJM $8.65 M 8650523.7028 Distant 2nd in liquidity
UBM $2.52 M 2521814.4 High closure risk, hard to trade
BDG $375.81 K 375807.3 High closure risk, hard to trade
ETF.com Grade as 03/23/17
Commodities: Industrial Metals
ETF.com Efficiency Insight
The range of fees in the segment is relatively narrow, and although the difference between the cheapest fund (UBM) and the most expensive (RGRI) is 30 bps, the bulk of the segment is around
“The range of fees is relatively narrow, but poor tracking may add cost over time” 75 bps.
Investors should be aware that most of the segment's funds struggle mightily in tracking their indexes tightly, meaning the true holding cost will vary greatly depending on the timing of entry.
As such, there is very little separating each fund in Efficiency scoring outside of the closure-risk penalties that plague many of the products in the segment thanks to such meager asset tallies.
Despite the fact that few ETNs are closed prior to their termination dates because they are reasonably cheap to manage, all funds except DBB are currently an elevated risk of closure. (Insight updated 03/28/17)
ETF.com Tradability Insight
There is only one industrial metals product that sees significant liquidity: DBB. Around $2M worth of DBB changes hands daily, which is more than the amount invested in some of its smaller
“There is only one industrial metals product that sees any regular trading: DBB” competitors. The average spread on DBB is just 12 bps, which is less than a third that of the next-cheapest fund to trade.
JJM gets around $25K in volume most days. All the other segment funds have a median daily dollar volume of zero, meaning most days not a single share changes hands. Regardless, any retail investor considering these products will need to: consult indicative values prior to trading to ensure they're getting a fair deal; expect to pay wide spreads; and avoid market orders at all costs. They should also expect to wait for any executions, as the markets for these shares are stagnant.
Institutional investors will likely do better trading in full creation units, as there's ample underlying liquidity in all six funds. (Insight updated 03/28/17)
ETF.com Fit Insight
With so little separating the various products in the segment in Efficiency and one standout in Tradability, the exposure differences between the funds are of paramount importance.
“ the exposure differences between the funds are of paramount importance.” production-weighted benchmark has roughly 1/2 its weight in copper, the most widely produced metal on earth. Rounding out the benchmark is aluminum (30%), nickel (9%), zinc (9%) and lead (7%).
The fund that captures this mix best is UBM, whose Fit score is one of the best in the segment despite using of a proprietary methodology to pick and choose as many as five different contracts on each metal.
HEVY also sees one of the highest Fit scores in the segment and is perhaps the second-best choice for those looking for a neutral take on the segment, with the one caveat being that it excludes lead and sends its entire 7% weighting (and more) to a big overweighing in copper. Like UBM, HEVY does not track front-month futures, but instead chooses the contracts its index provider expects to be least influenced by contango.
RGRI is even broader than UBM in coverage, introducing tin to the portfolio. It also weights each metal based on Jim Roger’s assertion of economic import, so copper gets a 14% haircut and zinc gets a 6% boost.
Another decent look at the market is JJM, which is the lone broadly focused fund to track only front-month futures. Like its sister fund HEVY, JJM excludes lead, but instead of a corresponding overweighting to copper, JJM overweights nickel and zinc.
The two remaining funds, DBB and BDG, are close proxies for one another. Both funds equally weight just three metals—copper, zinc and aluminum—and both use a dynamic contract selection process aimed at dampening decay.
Despite the differences in exposure, the performance variation among the segment is relatively narrow, as industrial metals are highly correlated.
In addition, none of the various proprietary selection methodologies has had a large impact on expected rates of decay; meaning investors should focus more on the metals that each product tracks rather than getting caught up in which portion of the curve they are focused on. (Insight updated 03/28/17)