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How to play base metals with ETFs Add to ...

Alcoa Inc. starts the second-quarter earnings report season by releasing results after the close today. Earnings for global base metal producers on a year-over-year basis generally are expected to show strong gains, mainly because of higher base metal prices. For example, Alcoa is expected to report 33 cents versus 13 cents per share last year. However, global base metal producers also are likely to lower guidance for the third quarter due to a decline in base metal prices in the second quarter relative to the first quarter.

Investors easily can monitor base metal prices by examining the price performance of exchange traded notes (ETNs) and exchange traded funds (ETFs) that track base metal prices. Fifteen ETNs trade on U.S. exchanges and three ETFs trade on the Toronto Stock Exchange. All funds are an amalgamation of futures contracts and short-term notes designed to simulate the price of the underlying commodity.

Although 15 funds are available in the U.S., only eight are considered to have sufficient liquidity for investment purposes. Two types of funds are available: funds that track multiple metals and funds that track individual metals. Management expense ratios for all U.S. funds is 0.75 per cent.

The most actively traded base metal ETN is PowerShares DB Base Metals . Units track a basket that is one-third investing in aluminum, one-third invested in zinc and one-third invested in copper .

iPath offers the iPath DJ-UBS Industrial Metals ETN . It tracks the prices of four base metals. Content and weights are copper (42.42 per cent), aluminum (29.76 per cent), zinc (15.61 per cent) and nickel (12.21 per cent).

RJI offers ELEMENTS Rogers International Commodity ETN that tracks six base metals. Content and weights are copper (29 per cent, aluminum (29 per cent), lead (14 per cent), zinc (14 per cent), nickel (7 per cent) and tin (7 per cent).

The remaining liquid ETNs track individual commodities. All are sponsored by iPath:



Name Commodity Symbol US Price

iPath DJ-UBS Copper Index Copper

iPath DJ-UBS Tin Index Tin

iPath DJ-UBS Nickel Index Nickel

iPath DJ-UBS Aluminum Aluminum

iPath DJ-UBS Lead Lead



Horizons offers three exchange traded funds that tracks the price of copper futures. They trade on the Toronto Exchange in Canadian dollars and are hedged against U.S. currency risk. The Horizons Beta Pro COMEX Copper ETF is the unleveraged version. Management Expense Ratio is 0.75 per cent. Horizons also offers the Horizons BetaPro COMEX Copper Bull + ETF and the BetaPro COMEX Copper Bear + ETF . The former tracks double the daily upside performance and the later tracks double the daily downside performance of COMEX Copper futures contracts.



Seasonal influences for base metals tend to be strongest from November to April. Following is a seasonality chart on Alcoa that demonstrates this:





The technical profile for base metal prices currently is mixed. Most base metal prices peaked in mid-April and have drifted lower since then. All have recovered during the past three weeks following news that China’s inventories of base metals are below normal and are about to be replenished. Following is a one-year chart on the aluminum ETN that demonstrates this:

Preferred strategy is to monitor base metal prices between now and the end of October for a possible seasonal entry point into base metals and base metal equities, ETNs and ETFs late this year.



Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. He is also a research analyst for JovInvestment Inc. Reports are available at www.timingthemarket.ca and www.equityclock.com. Follow him on Twitter @EquityClock.

Follow on Twitter: @EquityClock

 
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