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Spools of copper rods in Miami, Ariz.
Spools of copper rods in Miami, Ariz.

ETFs

How to use ETFs to play copper Add to ...

Copper has been on tear recently. Its latest gains come after news that ETF Securities, a Europe-based ETF issuer, filed a plan with the Securities and Exchange Commission to launch a physically-backed exchange traded product in the United States that tracks the price of copper.

The filing also targeted other physically-backed exchange traded products including aluminum, lead, nickel, tin, zinc and a basket of the six base metals. The timing of the issues, their symbols and expense ratios were not including in the filing.

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Expense ratios on the proposed industrial metal funds are expected to be higher than the expense ratios charged for the highly successful physically-backed gold, silver, platinum and palladium ETFs. Storage costs for industrial metals are significantly higher.

A copper price-tracking exchange traded product already exists in the United States. IPath offers an exchange traded note based on copper futures contracts. However, ETNs based on futures contracts may not accurately track the spot price of the underlying commodity accurately over a long period of time due to contango and backwardation issues related to futures contracts. Contango and backwardation effectively are eliminated when trading physically backed ETFs.

Canadian investors also have access to copper-related exchange traded funds. Horizons recently launched the Horizons BetaPro COMEX Copper ETF . The ETF also is based on futures contracts and trades in Canadian dollars.

This ETF is an addition to two previously launched ETFs, the Horizons BetaPro COMEX Copper Bull+ ETF and the Horizons BetaPro COMEX Bear + ETF . The former attempts to realize two times the daily upside performance of COMEX futures contracts currently held by the fund. The latter attempts to realize two times the daily downside performance on COMEX futures contracts currently held by the fund.



Two exchange traded funds on copper equities are available on U.S. exchanges, the Global X Copper Miners ETF and the First Trust ISE Global Copper Index Fund . Both funds hold a diversified basket of 30 copper mining stocks.

Canadian investors likely favour the Global X Fund slightly more than the First Trust ETF because of its greater exposure to the Canadian mining sector (47 per cent versus 34 per cent). In addition, the Global X ETF is more actively traded.

The outlook for copper in 2011 is encouraging. According to the International Copper Study Group, copper demand is expected to exceed supply by 435,000 metric tonnes in 3011. Annual production is approximately 18 million metric tonnes. Demand for copper continues to grow in emerging nations and in developing nations such as China, Brazil and India.

On the charts, copper has a positive technical profile. Resistance exists at its all-time high at $4.6575 (U.S.) per lb. set three weeks ago. After reaching its high, copper fell 9.0 per cent to reach a low late last week at $4.2435. Short term momentum indicators moved to oversold levels late last week and are showing signs of recovery.

Technical profiles on copper mining ETFs are similar to the technical profile on copper.

Seasonal influences for copper are encouraging at this time of year. Demand for copper increases during the spring auto and construction season. A 20-year seasonality chart shows that copper moves higher from February to July. (The chart represents the seasonality for copper futures continuous contract for the past 20 years.)

Ownership in copper, copper-related exchange traded funds and copper-related mining equities makes good sense at this time of year.



Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. He also is a research analyst with JovInvestment Management Inc.

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