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.

Investing In A Precious Metals ETF – 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, 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.

Why A Precious Metals ETF?

We live in economically rough times. In the wake of the most recent recession, jobs are scarce, home values have decreased, and many retirement portfolios have been severely depleted. One of the biggest problems that our economy could face in the near future is inflation. Inflation is normally tracked with the consumer price index, or CPI. This index tracks the price of common goods and services throughout the country, and is a good judge of inflation.

The real cause for concern is the devaluation of the dollar. As the Fed prints more and more money as a way to stimulate the economy (quantitative easing), the value of that money decreases. Increased inflation is a way to see this devaluation in action.

Many investors are worried that their portfolios won’t be able to keep up with inflation if there is a spike in the CPI. Very conservative investment strategies that yield under 5% return might end up being a wash if inflation reaches that number. This is especially troublesome for retirees that live off of their investment returns. There are a few different commodities that offer an inflation and a dollar devaluation hedge. These include oil, agriculture, and precious metals.

The precious metals category, when relating to commodities, includes gold, silver, platinum, and palladium most commonly, but also can include copper and nickel. These metals offer protection against dollar devaluation and inflation. In recent years, we have seen the prices of these metals skyrocket into almost unbelievable price ranges. Any investment strategy, and especially a retirement plan, should seriously consider adding exposure to precious metals through an ETF.

How To Buy Precious Metals

Trading precious metals the traditional way meant gaining access to a pit trader, or physically buying the commodity in question. Mutual funds that have positions in precious metals 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.

When dealing with precious metals, it is not uncommon to find an ETN rather than an ETF. A precious metals ETN is basically a debt product similar to a bond that is issued by a major bank or other supplier as a senior debt note. This differs from an ETF, which is an actual security or commodity or currency derivative, such as options, forwards, and futures. ETNs have different risks associated with them than ETFs, the biggest being credit risk. Keep this in mind if you find a precious metals ETN that you are interested in.

ETFs in precious metals can be broken down into:

  • Broad precious metals ETF
  • Specific precious metal ETF

Broad precious metals funds include holdings in:

  • Gold
  • Silver
  • Platinum
  • Palladium
  • Nickel
  • Copper

The first four are the most common precious metals exchange options, and the later two are sometimes incorporated into a broad precious metals fund. The specific precious metal ETF is mostly exclusive with the type of metal you are intereted in. If you want to add gold exposure to your portfolio, look for the best gold ETF to add. If you want silver exposure, look for a silver ETF. Broad ETFs are nice because they allow you to add exposure to all the different metals in one trade, making it easy to diversify.

There are several different methods for trading precious metals ETFs. These methods are discussed below.

Index Funds

Index ETFs are funds that track a specific index. For example, the PowerShares DB Precious Metals (DBP) ETF tracks the Deutsche Bank Liquid Commodity Index – Optimum Yield Precious Metals Excess Return. As the index goes up or down, so does the share price of DBP.

Leveraged Funds

Leveraging is one of the great tools that often comes with ETF investing. There are many funds that attempt to double, triple, or quadruple your return. They achieve this through margin investing. For example, the ProShares Ultra Gold (UGL) ETF seeks to double the return on the value of gold bullion. It is not uncommon to find a 2x gold ETF or 3x gold ETF among the different leveraged precious metals ETF options on the market.

Inverse Funds

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

Trading ETF Options

Buying or selling call or put options for a precious metals ETF is another method for trading these funds. This is a great way to hedge against a future spike or severe drop in precious metal prices, 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 your are allocating your money.

Precious Metals ETF List Of Options

Broad Precious Metals ETFs

PowerShares Global Gold & Precious Metals (PSAU)

PSAU tracks the NASDAQ OMX Global Gold and Precious Metals Index. Founded in 2008, PSAU invests at least 90% of assets in the securities and ADRs and GDRs based on the securities that comprise the underlying index. It normally invests at least 80% of total assets in securities of companies involved in the gold and other precious metals mining industries. The index is designed to measure the overall performance of globally traded securities of the largest and most liquid companies involved in the gold and other precious metals mining industry. PSAU is an example of a broad precious metals ETF.

iPath Pure Beta Precious Metal  (BLNG)

BLNG tracks the Barclays Capital Commodity Index Precious Metals Pure Beta TR index. The index is comprised of a basket of exchange traded futures contracts, and uses an allocation methodology designed to mitigate the effects of certain distortions in the commodity markets on such returns. This ETF utilizes a different futures roll strategy to limit risks. BLNG is another example of a broad precious metals fund.

Gold ETFs

Direxion Daily Gold Miners Bear (DUST)

Founded in 2010, DUST seeks daily investment results of 300% of the inverse (or opposite) of the performance of the NYSE Arca Gold Miners Index. The fund creates short positions by investing at least 80% of its net assets in: futures contracts; options on securities, indices and futures contracts; equity caps, collars and floors; swap agreements; forward contracts; short positions; reverse repurchase agreements; exchange-traded funds (ETFs); and other financial instruments that, provide leveraged and unleveraged exposure to the index. DUST is an example of an inverse leveraged 3x gold ETF.

FactorShares 2X Gold Bull S&P50 (FSG)

Founded in early 2011, FSG seeks to replicate twice the daily return of the Gold Bull/S&P500 Bear index. The fund is is designed for investors who believe that gold will increase in value relative to the large-cap U.S. equity market segment, in one day or less, by primarily establishing a leveraged long position in Gold futures and a leveraged short position in the E-mini S&P 500 Stock Price index futures. FSG is an example of a leveraged 2x gold ETF.

Silver ETFs

PowerShares DB Silver Fund (DBS)

Founded in 2007, DBS tracks the price and yield performance of the Deutsche Bank Liquid Commodity Index – Optimum Yield Silver Excess Return. The index is a rules-based index composed of futures contracts on silver and is intended to reflect the performance of silver.

ETFS Physical Silver Shares Tru (SIVR)

SIVR seeks to replicate the price of silver bullion. The shares are backed by physically allocated silver bullion. All physical silver held conforms to the London Bullion Market Association’s rules for good delivery. If you are looking for an ETF that actually physically holds the commodity in question, SIVR is a good example of such a fund.

Platinum and Palladium ETFs

First Trust ISE Global Platinum (PLTM)

PLTM tracks the ISE Global Platinum 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 platinum group metals (PGM) mining based on revenue analysis of those companies. PLTM is a non-diversified ETF.

ETFS Physical Platinum Shares (PPLT)

Founded in 2010, PPLT seeks to reflect the performance of the price of physical platinum. This is another example of an ETF that physically holds the commodity, and is a great way for an investor to manage credit risk that is associated with other ETFs and ETNs.

ETFS Physical Palladium Shares (PALL)

Also founded in 2010, PALL seeks to reflect the performance of the price of physical palladium. PALL is designed for investors who want a cost-effective and convenient way to invest in palladium with minimal credit risk. Advantages of investing in the Shares include: Ease and Flexibility of Investment, Expenses, Minimal Credit Risk.

Copper ETFs

First Trust ISE Global Copper I (CU)

Founded in 2010, CU tracks 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 non-diversified.

Global X Copper Miners ETF (COPX)

COPX, founded in 2010, tracks the price and yield performance of the Solactive Global Copper Miners Index. COPX invests at least 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.

Nickel ETNs

iPath Dow Jones UBS Nickel Subi (JJN)

Founded in 2007, JJN tracks the price and yield performance of the Dow Jones-UBS Nickel Total Return Sub-Index.  The note is designed to reflect the performance of nickel. The index is composed of the Primary Nickel futures contract traded on the London Metal Exchange. This is an example of an ETN, and has different credit risk associated with it than an ETF.

iPath Pure Beta Nickel ETN (NINI)

NINI is another ETN for nickel. NINI seeks to replicate the Barclays Capital Nickel Pure Beta TR index. The index is comprised of a single exchange traded futures contract, except during the roll period when it may be comprised of two futures contracts. NINI utilizes a specific roll schedule and futures strategy to limit futures roll price risk impact. NINI is another example of an ETN rather than an ETF.

In Conclusion

Adding commodity exposure through ETF investing to your portfolio 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. Precious metals ETFs are an attractive asset to include for these reasons. Use the list above to start your precious metals research. As always, good luck!

Disclosure

I have no positions in any ETFs 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.