Choosing The Right Copper ETP

January 30, 2013

 

Futures Or Physical

Commodity ETFs are another way to gain exposure to the price of copper.

A commodity copper ETF gains its exposure either by purchasing physical copper or by using futures contracts. There are advantages and disadvantages of both.

Buying, storing and selling a physical commodity is far more expensive than purchasing a futures contract from an exchange, so operational costs are likely to be high for physically backed ETFs.

On the other hand, futures contracts are subject to the effect of contango, which will likely reduce realized yield. Contango refers to new contracts being more expensive than expiring ones, which hurts returns—sometimes by a lot over the longer term—as fund managers maintain exposure.

Currently, the United States Copper Index Fund (NYSEArca: CPER) is the only option in this category. It uses futures contracts to gain its exposure, which means it is subject to the deleterious effects of contango, or negative roll yield. It does, however, “optimize” those contracts to mitigate those effects.

Two years after filing, the Securities and Exchange Commission recently granted J.P. Morgan permission to market a physically backed copper ETF. However, the SEC recently postponed its decision to allow iShares to market a very similar product, so it’s not yet clear if any physical copper funds will be brought to market soon.

Still, it seems likely, at which point we will finally see if investors are interested in such products.

ETNs

The final way to gain exposure to the price of copper is through an ETN. ETNs are senior debt notes issued by large banks so, in contrast with ETFs, exchange-traded notes are subject to counterparty risk.

The bank promises to pay the returns of the index minus a management fee, which means there’s no tracking fee. But you’ll need to pay particular attention to who your counterparty is and what index they use.

There are currently two copper ETNs: the iPath Pure Beta Copper ETN (NYSEArca: CUPM) and the iPath Dow Jones-UBS Copper Total Return ETN (NYSEArca: JJC).

Both ETNs provide the returns (minus fees) of indexes that track the performance of futures contracts. JJC uses front-month contracts, whereas CUPM optimizes its contracts in an attempt to mitigate the effects of contango.

Ultimately, a broad collection of exchange-traded products offer exposure to the metals market. Each product has a different approach and offers different exposure.

As always, it’s crucial to choose the product that aligns best with your investment goals.


At the time this article was written, the author held no positions in the securities mentioned. Contact Spencer Bogart at [email protected].

 

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