iShares Copper ETF Gets Green Light

February 25, 2013

The SEC allows the physical copper trust to proceed, but plenty of obstacles remain.

The Securities and Exchange Commission has finally given its stamp of approval to the iShares Copper Trust, a physically backed exchange-traded fund that has been in the regulatory pipeline for over two years.

It’s the second such ruling the SEC has made on a copper ETF. Late in 2012, it green-lighted a similar security from J.P. Morgan, but that decision was immediately challenged by two copper wire producers, who argued in legal paperwork seeking to block the ETF that the fund could tie up a lot of copper supply.

It’s possible that the SEC’s latest ruling regarding the iShares Copper Trust could be challenged as well, as the law firm representing the wire producers is contemplating doing just that, a lawyer with the firm Eaton Van Winkle told IndexUniverse. But that remains to be seen.

In its latest statement, the regulatory agency not only debunked the argument that the trust would disrupt the supply of copper available for immediate delivery and lead to price manipulation, but went as far as to say that the fund would, in fact, provide investors with another investment alternative that “could enhance a well-diversified portfolio.”

Copper is widely used in cable, wire and electrical products for the electrical and building industries. Demand from emerging markets—China in particularhas fueled sharp price increases in recent years.

Industrial copper consumers have feared that growing access to the copper market could constrain supplies and increase prices. One comment letter submitted to the SEC, in fact, argued that the trust would increase transparency in the copper space, and that might not be good for price discovery.

"It always struck me as ironic that firms that actually could manipulate a physical commodity market are complaining about a fund that not only cannot manipulate the market, but which would bring a new level of transparency to the market," United States Commodity Funds' John Hyland told IndexUniverse following the ruling. USCF is behind the futures-based copper ETF, the United States Copper Index Fund (NYSEArca: CPER).

The SEC seems to agree. Arguing that the iShares Copper Trust could not "burden capital formation for users," the regulatory agency said none of the evidence supports naysayers.

“Given the structure of the trust, the Commission believes that the amount of copper accessible to industrial users will not meaningfully change as a result of the listing and trading of the shares,” the SEC said in its statement.

‘The Commission believes that the listing and trading of the shares, as proposed, could be another way for market participants and investors to trade copper, and could enhance competition among trading venues,” it added.

Citing research it did with gold, silver, platinum and palladium ETFs, the SEC argued that it found no "observable" relation between asset flows into these ETFs and subsequent price changes of the underlying metals.

As noted, back in December, the SEC approved a similar strategy—the JP Morgan XF Physical Copper Trust—the market’s first U.S.-listed physical copper strategy to gain regulatory approval, but that fund has not been launched yet.

The long-awaited nod is certainly only another step in the process, and by no means points to an imminent launch. iShares now must submit a prospectus that would still need regulatory approval before it can launch the fund.

Both the iShares Copper Trust and J.P. Morgan's copper fund were first put into registration in 2010. ETF Securities has a physical copper ETF listed in London, but the fund has not gathered many assets since its launch in December 2010.


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