Commodities: Industrial Metals Copper
Although there's only three funds in the Copper segment, investors must select carefully because the differences between the funds are significant, and can lead to big performance
“There are four important distinctions to make...” differences over time.
Between the funds in the Copper segment, there are four important distinctions to make: product structure; rolling strategy; expenses; and liquidity. Two of the three funds (JJC & CUPM) are structured as ETNs, so investors bear the counterparty risk of their issuer, Barclays, unlike CPER, which is structured as an ETF. Investors will have to pay up to eliminate counterparty risk, however, as CPER's expense ratio is significantly higher than JJC and CUPM.
Another significant differentiator between the funds is their roll strategy: Two funds (CUPM & CPER) attempt to mitigate the yield-eroding effects of contango, whereas JJC is a first-generation product. JJC sticks to front-month futures contracts, whereas CPER and CUPM optimize the contracts they select to reduce the harmful impacts of contango. It's also worth noting JJC is the only product with reasonable liquidity and the only fund not at high risk of closure. (Insight updated 10/23/17)
ETF.com Efficiency Insight
None of the funds are highly efficient, but the two ETNs, JJC and CUPM, get a nod for charging significantly lower expense ratios than CPER. Between the two, JJC is 10 bps cheaper, but its
“JJC is 10 bps cheaper, but its realized fee will vary based on performance” realized fee will vary based on performance. That translates to less predictable tracking results that, in the past 2 years, have tended to be significantly higher than the headline rate. CUPM's tracking results are much more stable by comparison.
CPER's high fee is a side effect of its commodity pool structure and low assets—it has significant tax accounting expenses, which are largely fixed costs that must be spread across the fund's tiny AUM. Should the asset level pick up, the fee will go down.
Speaking of asset levels, only JJC has attracted any significant interest from investors. Its two peers are at high risk of closure, and will likely be difficult to trade unless they manage to attract more capital. (Insight updated 10/23/17)
ETF.com Tradability Insight
JJC is by far the most liquid fund in the segment. Trading volume in the other two funds is dismal at best, and comes with wide bid/ask spreads. In contrast, JJC posts impressive volume
“JJC posts impressive volume most days” most days, which contributes to much tighter spreads. Investors trading in bulk can have their choice, however, as all three funds score well in block liquidity. Those looking to get the best price on CPER and CUPM would do well to trade a full creation unit directly with the help of an AP. (Insight updated 10/23/17)
ETF.com Fit Insight
All of the funds in the segment use futures contracts to attain 100% exposure to copper, so the differences between the funds come down to contract selection and the consideration paid to
“JJC is the only fund in the segment that turns a blind eye to contango” contango. JJC is the only fund in the segment that turns a blind eye to contango, and simply selects the front-month contract closest to expiration.
By comparison, CUPM and CPER attempt to optimize the contracts they purchase to mitigate the decay that stems from a term structure in contango. CUPM selects the contract that exhibits the least contango, whereas CPER places its eggs in multiple baskets by using a laddered mix of 2 or 3 contracts that are less impacted by contango.
In deeply contangoed markets, we expect CUPM's and CPER's strategies to outperform relative to JJC. However, JJC's liquidity and low-fee advantage may trump any benefits from contango mitigation. (Insight updated 10/23/17)