Looming Copper Crunch May Boost ETFs

October 03, 2022

Growing demand for technologies intended to help with the transition to a low-carbon economy appears to be pinching one of the materials critical to that change: copper. 

S&P Global Market Intelligence noted in a report earlier this month that “copper will inevitably rise.” The analytics firm released two reports on the potential looming threat of a copper shortage, with the first one covering the mining industry’s underinvestment in copper exploration and the development of new mines.

The other focused on possible solutions to the problem, such as recycling and using copper alternatives. 

Rising prices will for some raise the question of how one can invest in the commodity. Exchange-traded funds offer possibilities, including one equity fund and two commodity futures products.  

COPX 

The $1.2 billion Global X Copper Miners ETF (COPX) is the largest exchange-traded product targeting the metal and covers copper-mining companies’ shares.  

The fund has 41 holdings, with the largest weightings in OZ Minerals Ltd., Glencore Plc and Teck Resources Ltd. Canada represents more than 31% of the fund, while Australia is the second-largest country, with a weighting of nearly 15%.  

Despite the rising demand for copper, COPX is down 25% so far this year. That drop is similar to that of the Vanguard Total World Stock ETF (VT), which tracks the global stock market and has also dropped 25% so far year.  

COPX has pulled in $689 million over the past 12 months, though year to date, it has seen nearly $21 million in outflows.  

Commodity Futures Products 

In addition to COPX, two ETFs offer exposure to copper through futures contracts. The United States Copper Index Fund (CPER) is the larger of the two, at $133 million. It’s structured as a commodities pool, and investors receive a blended tax rate on capital gains as well as having to contend with a K-1 form at tax time.  

The iPath Series B Bloomberg Copper Subindex Total Return ETN (JJC) has $69 million in assets under management. Its exchange-traded note structure means it’s essentially a senior, unsecured debt security. 

The two products have performed similarly, with CPER down 27% for the year-to-date period, while JJC has dropped 26%. Meanwhile, the Invesco DB Commodity Index Tracking Fund (DBC) has gained 14% year to date.  

When choosing between the two copper futures products, investors should consider aspects such as tax consequences and pricing. JJC is the cheaper of the two, with an expense ratio of 0.45%, while CPER charges 0.85%.  

Final Thoughts 

With numerous ways to gain exposure to the performance of copper, investors need to consider their goals. With no physical copper ETF available (though there were attempts to launch one by JPMorgan and iShares about a decade ago), the futures products may be the best way to get something resembling spot price exposure to the commodity.

However, roll costs—added expenses from rolling into new contracts from expiring pacts—can be a drag on these products. 

As an equity ETF, COPX comes with the risks associated with any fund that tracks stocks, and will have a higher correlation with the broader market than a futures-based product. The price of the equity fund will also likely correlate less closely with copper’s real-time price.  

It depends on what the investor sees as the best way to get exposure to the performance of copper in the context of their existing portfolio.  

 

Contact Heather Bell at [email protected] 

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