Matt McCall: Aluminum: Dissecting ALUM

January 24, 2011

Given higher aluminum prices, does the new aluminum miner ETF make more sense than the current ETN?

In early January, Global X Funds launched the Global X Aluminum ETF (NYSEArca: ALUM), the first ETF to invest specifically in aluminum mining companies.

Aluminum mining may sound like far too narrow a sector in which an ETF could thrive. But given the ongoing commodity boom and the underlying metal's excellent fundamentals, the case for aluminum investment grows stronger every day.

Due to its lightweight nature and its resistance to corrosion, aluminum is an invaluable metal to a number of industries, and its versatility makes its usage ideal in everything from soda cans to automobiles.

Increasing demand from China and other emerging markets has driven the price of the metal higher in recent months. According to Global X, aluminum demand has grown by 38 percent over the past decade, compared to 20 percent growth in other metals, and much of this demand can be attributed to the worldwide infrastructure build-out, particularly in the emerging markets.

Theoretically speaking, another potential price driver for aluminum would be the launch of a physically backed ETF. As we saw in the precious metals space, the launch of a physical ETF would create an increase in demand for physical metal, as fund companies buy up aluminum supply to back the purchase of their ETF shares by investors.

Citigroup has estimated that the introduction of such an ETF could raise aluminum prices by as much as 24 percent. Naturally, the biggest beneficiary of these rising prices would be aluminum miners, as offered by ALUM.


There currently is an ETN that tracks the price of aluminum, the iPath Dow Jones-UBS Aluminum ETN (NYSEArca: JJU). JJU tracks the price of a single aluminum futures contract, although because it is an ETN and not an ETF, it does not actually own the physical metal. JJU failed to capture much of last year's excitement in aluminum, lagging the overall market and its peers with a gain of only 4.5 percent in 2010.

But for those who believe higher aluminum prices are on the way, miners would make more sense than futures anyway, because of the leverage they offer for a potential rally.

Enter ALUM. The ETF tracks the Solactive Global Aluminum Index, which is intended to track the performance of the worldwide aluminum industry's largest and most liquid producers. A total of 22 stocks make up the ETF, with U.S. companies making up 22 percent, followed by Hong Kong miners at 20 percent. Fifteen percent is allocated to Japanese and U.K. companies each.

But given that producers rarely concentrate in aluminum as a primary business, ALUM's largest holdings are therefore large, diversified firms known to most investors: Rio Tinto Plc (NYSE: RIO), Alcoa (NYSE: AA), and Norsk Hydro (NYSE: NHY). In fact, the top 19 holdings account for 69 percent of the total allocation, with the top two names making up one-quarter of the entire portfolio.

This concentration in large-cap names could be an issue for some investors who seek more diversification. However, there are not a large number of liquid aluminum stocks to choose from and therefore the concentration is inevitable.

ALUM charges an expense ratio of 0.69 percent, which is higher than average. Then again, ALUM is a more niche product than most.

Is Now The Right Time For ALUM?

One big upside to ALUM is that if the global economic rebound continues, ALUM should be a direct beneficiary as demand for the metal increases worldwide. On the flip side, if the economic rebound fizzles out, or if China attempts to slow its booming economy, we could see an oversupply of aluminum leading to lower prices, which would therefore hurt ALUM.

Either way, it all comes back to recovery.


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