Copper ETF Basics – What You Need To Know

Many investors are seeking the ability to add commodity exposure to their portfolios. This can be difficult for most home-based investors to achieve through traditional methods. Since the advent of exchange-traded funds (ETFs), anyone with a brokerage account can now easily jump into the commodities market. When it comes to trading commodities, there isn’t an easier method than by utilizing commodity ETFs.

Copper

Why Invest in Copper?

Most investors looking to add commodity exposure to their portfolios think of oil, gold, and agriculture commodities. These are great positions to have to protect against future inflation. But what about a commodity that will rise with future economic growth? This is where copper comes in.

Copper is technically a precious metal, but definitely doesn’t have the ‘jewelry based’ value of gold or silver. The value of copper is in what it can be used for. Copper is widely used in construction, from pipes in plumbing and roofing to high tech machinery. Many investors see copper as a leveraged play on the health of the global economy, since increased building and production will demand more copper to be used.

One thing to keep in mind is that during economically poor times, the bottom can fall out in the demand for and price of copper. Diversity is the key to weathering hard times. Positions in copper, as well as gold and silver, will hedge you against future uncertainty.

How to Buy Copper Positions

Investing in copper, or any precious metal for that matter, the traditional way meant gaining access to a pit trader who would then allocate money towards the commodity. Mutual funds that have positions in copper lack transparency and are riddled with fees. ETFs allow you the ability to bypass brokers and pit traders altogether, as well as increase the transparency in your investments.

Note: There may not be many options available for strictly copper ETFs. Exchange-traded notes (ETNs) are another vehicle to gaining copper exposure, but have different credit-associated risks associated with them.

Copper ETFs (or ETNs) can track different aspects of this commodity, such as:

  • Mining industry
  • Construction industry
  • Physical copper

Diversified copper funds will include all of these at some pre-determined percentage. There are several different methods for trading copper ETFs. These methods are discussed below.

Index Funds

Index ETFs are funds that track a specific index. For example, as the First Trust ISE Global Copper Index goes up or down, so do specific ETFs that track this index.

Copper Futures Funds

Some copper ETFs trade in futures contracts. The copper ETF or ETN purchases the front month futures contract on the NYMEX, for example. When the front month is within 2 weeks of expiration, they will ‘roll’ the contract into the next month (or sell the position from the front month and buy positions in the next month). This ensures that your position in copper will always be ‘long.’

Leveraged Funds

Leveraging is one of the great tools that often comes with ETF or ETN investing. There are many funds that attempt to double, triple, or quadruple your return. They achieve this through margin investing. For example, the VelocityShares 2x Long Copper ETN (LCPR) is leveraged 2x in an attempt to double your return on copper prices. It is not uncommon to find a 2x copper ETF or 2x copper ETN among the different leveraged copper ETF options on the market.

Inverse Funds

What if you want to bet against the price of copper and make money on it? There are two ways to go about doing this. You can short a copper index ETF or ETN, which would mean that as the index price decreases, you can sell the stock short and make a profit. There are also inverse ETFs and ETNs available, which are basically short copper ETF options. These funds are basically doing the short selling for you, as they track the inverse of the index fund or price of the commodity. Leveraging can also be applied to this investing strategy (for example, you could buy a fund that tracks the inverse of the copper price or index, but triples the return of the short position).

Trading ETF Options

Buying or selling call or put options for a copper ETF is another method for trading these funds. This is a great way to hedge against a future spike or severe drop in copper price, since you don’t actually have to allocate money until the strike price has been met.

Editor’s note – leveraged investing, margin investing, and options investing include substantially increased risk. Be sure you do your homework and understand exactly how you are allocating your money.

Copper ETF List Of Options

First Trust ISE Global Copper Index Fund (CU)

Founded in 2010, CU tracks the price and yield of an equity index called the ISE Global Copper Index. The fund invests at least 90% of assets in common stocks that comprise the index or in depositary receipts representing securities in the index. The index is designed to provide a benchmark for investors interested in tracking public companies that are active in the copper mining business based on analysis of revenue derived from the sale of copper. CU is an example of an index ETF that doesn’t involve futures based trading aspects, since the fund invests in equities.

Global X Copper Miners ETF (COPX)

COPX tracks the price and yield performance of the Solactive Global Copper Miners Index. The fund invests 80% of assets in securities and depositary receipts that comprise the index. The index is designed to measure broad based equity market performance of global companies involved in the copper mining industry. The fund uses a replication strategy. COPX is similar to CU, in that it utilizes an equities based trading strategy to gain exposure to the copper mining industry and its companies. While CU is a more broad-based mining index fund tracker, COPX strictly tracks the mining and supply of copper.

United States Copper Index Fund (CPER)

Founded at the end of 2011, CPER tracks the SummerHaven Copper Index. CPER invests to the fullest extent possible in the Benchmark Component Copper Futures Contracts. It also invests in Treasuries and holds cash and/or cash equivalents to meet its current or potential margin or collateral requirements with respect to its investments in Copper Interests and invests cash not required to be used as margin or collateral. The index is a single-commodity index designed to be an investment benchmark for copper as an asset class. The Copper Index is composed of copper futures contracts on the COMEX exchange. CPER is an example of an index ETF with a futures-based trading strategy.

Copper ETNs

iPath Dow Jones UBS Copper Total Return ETN (JJC)

Founded in 2007, JJC tracks the price and yield performance of the Dow Jones-UBS Copper Total Return Sub-Index. The note is designed to reflect the performance on copper contracts. The index is composed of Copper High Grade futures contract traded on the New York Commodities Exchange. JJC is one of the oldest copper funds on the market today, and it not only tracks the spot price of copper, but also the futures curve. JJC is an ETN, which has different risks associated with it than a traditional ETF.

iPath Pure Beta Copper ETN (CUPM)

CUPM tracks the Barclays Capital Copper Pure Beta TR index. The index is comprised of a single exchange traded futures contract, except during the roll period when the Index may be comprised of two futures contracts. However, unlike many commodity indices which roll their exposure to the corresponding futures contract on a monthly basis in accordance with a pre-determined roll schedule, it may roll into one of a number of futures contracts with varying expiration dates, as selected using the Barclays Capital Pure Beta Series 2 Methodology. This roll strategy mitigates the risk of futures contago, but because CUPM is an ETN, it has other credit associated risks similar to that of JJC.

VelocityShares 2X Inverse Copper ETN (SCPR)

SCPR is looking to return twice (2x) the opposite (inverse) of the S&P GSCI Copper Index ER. The index comprises futures contracts on a single commodity and is calculated according to the methodology of the S&P GSCI Index. SCPR is an example of a leveraged inverse copper ETN, and has specific risks associated with it (inverse, leveraged, futures based strategy, and credit associated risks).

VelocityShares 2X Long Copper ETN (LCPR)

Founded in early February 2012, LCRP tracks the S&P GSCI Copper Index Excess Return (200%). LCPR is a 2x leveraged copper ETN. The index is composed entirely of copper futures contracts and is derived by reference to the price levels of the futures contracts on a single commodity as well as the discount or premium obtained by “rolling” hypothetical positions in such contracts forward as they approach delivery.

In Conclusion

Adding commodity exposure to your portfolio through ETF or ETN investing is a great way to add diversity, as well as inflation protection. With the many advantages of ETF trading (intraday investing, low cost, transparency of assets), you can increase your bottom line with respects to investment results.

Copper is a unique example of a commodity that will grow in value along with the economy, and a great way to diversify your precious metals positions with a commodity that will often go in the opposite direction from the others. Good luck and happy investing!

Disclosure

I have no positions in any ETFs or ETNs mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: Please remember to do your own research prior to making any investment decisions. This article is not a recommendation to buy or sell any securities or stocks, and is the opinion of the author.