Everyone’s excited about the pending launch of physical copper ETFs. I think they’ll be a bust.
Well, maybe not a bust. More like a whimper than a bang. They’re certainly not going to be blockbuster products along the lines of the $57 billion SPDR Gold Shares (NYSEArca: GLD) or the $10 billion iShares Silver Trust (NYSEArca: SLV). In fact, I don’t think they’ll live up to the $533 million ETFS Physical Platinum Shares ETF (NYSEArca: PPLT). And they definitely won’t create the immediate shortage of physical copper on the London Metals Exchange that so many people are worried about.
Here’s why: Not that many people want to buy copper in an ETF package.
Remember, ETP investors can already access copper. The iPath Dow Jones-UBS Copper Sub Index ETN (NYSEArca: JJC) has been on the market since October 2007. It’s a decent fund, but hardly a barn-burner, with just $174 million in assets. Things aren’t looking up, either: Investors put just $410,000 in net new cash to work in JJC since the start of 2010. That’s about $1,700 per trading day.
The copper-boom supporters say that this tepid interest is because people don’t like futures or ETNs. If they had an alternative, they’d be rushing in!
But investors do have an alternative: the Global X Copper Miners ETF (NYSEArca: COPX) that launched in April. It’s been modestly successful, but so far has attracted only $45 million in assets. The First Trust ISE Global Copper Index Fund (NasdaqGM: CU) has run even longer, with almost $68 million in assets.
$410,000? $45 million? $68 million? That’s chump change in the ETF space, which has seen $100 billion in total inflows this year.
Contrast that with gold and silver and you’ll see the difference. Gold mining ETFs have attracted more than $1 billion in net inflows this year, while gold bullion funds have pulled in nearly $8 billion. Silver miners have pulled in $205 million, while physical silver funds have pulled in more than $1 billion.
Copper responds to different market forces than the popular gold and silver products. Those products are seen as inflation hedges and stores of value in a world gone mad with quantitative easing. There is a massive and long-running history of people buying and holding physical gold and silver, from individual “mom-and-pop” investors all the way up to pension funds.
What It Doesn't Offer ...
Copper doesn’t have any of that. Pension funds aren’t dying to get their hands on physical copper. There aren’t rafts of academic literature detailing copper’s role in a long-term asset allocation strategy. And Uncle Jerry certainly isn’t storing copper under his floorboards. Copper is a play on economic growth and an indirect play on growth in China, and neither of those are red hot right now. The global economy is on tenterhooks, making the economic growth play unappealing.
Meanwhile, investors in China don’t need an indirect play: They can just buy Chinese equities instead.
Perhaps more importantly, storing physical copper is an expensive proposition. Current storage costs for physical copper are running at 1.5 percent a year. Add in the proposed management fees for these products, which will likely be around 0.75 percent, and you’re burning 2.25 percent a year simply to own physical copper.
That makes JJC a better choice for most investors. Unlike oil and natural gas, copper futures are currently trading in neither backwardation nor contango, meaning the performance of a rolling position in copper futures will more or less match that of spot … minus the 2.25 percent fees.
The stories about copper ETFs igniting the market are more flash than flame. They’re taking the lessons of the precious metals ETFs—which are impacting markets—and applying them to industrial metals.
The supply, demand and costs of physical copper are different. Over the course of a year or two, these funds may accumulate even $1 billion in copper, although I’m skeptical of that. But even in that scenario, the copper markets will barely notice.