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Choosing The Right Copper ETP

January 30, 2013
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Navigating the complex sea of ETP offerings to select the exposure that’s right for you.

If you’ve been looking to add metals to your portfolio lately, you might be confounded by the variety of exchange-traded options that offer exposure to the market.

Let’s shine some light on this pocket of the investment market. There are many metals to choose from, but I’ll focus on copper to simplify the comparison of the advantages and disadvantages of each investment approach.

All of the following are viable exchange-traded products that offer exposure to the copper market, but they do it in different ways that result in significant exposure and return differences. So, it’s important to understand the various products in order to match your investment thesis with the right product.

There are three main ways to access copper in an exchange-traded product: equity ETFs, commodity ETFs and ETNs (exchange- traded notes). Actually, physical copper isn’t strictly available right now, but it looks likely that it will be soon, as I discuss below.

Equities

First, there are equity ETFs. These ETFs acquire shares of publicly traded companies that mine or refine copper.

The important thing to understand here is that you’re gaining exposure indirectly, with the company’s stock price correlated with the price of copper. Depending on the company and the diversity of its operations, that may be a little or a lot.

The fact that exposure in this case is indirect is not inherently bad or good, it’s just reality. Following are two simple cases for why this avenue of exposure could be good or bad.

Imagine a copper miner or refiner with a competitive advantage—well positioned in the market and the exclusive producer of a particular good. Such a firm may have serious pricing power that allows it to outperform the spot price of copper.

Alternatively, the company could have diverse operations of which copper is only a small portion. In this case, the company’s stock price is a poor proxy for the price of copper because its stock price is subject to many factors other than the price of copper.

In this vein, there are currently two options on the market: The Global X Copper Miners ETF (NYSEArca: COPX) and the First Trust ISE Global Copper ETF (NasdaqGM: CU).

CU is the better of the two fund, in my opinion, because it uses a tiered allocation scheme that weights companies by the percentage of revenue generated from copper production. In contrast, COPX sticks to a straight market-cap-weighting scheme.

 

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