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Forget Gold, Bet on These Industrial Metal ETFs for 2017

Sanghamitra Saha

A rush to seek safety for the most part of 1H16 triggered by global growth issues and a major event like Brexit at the end of the second quarter bolstered demand for safe haven assets. As a result, safe metal gold saw a glorious rally in the first half of 2016 after a long time. Also, a subdued greenback proved to be a boon for the metal (read: Top ETF Stories of the First Half of 2016).

However, the rally lost steam going into Q4. The possibility of a faster Fed policy tightening and the resultant strength of the greenback as well as a Trump-induced rally in the stock market led to about a 13% drop in the metal in Q4 – marking “its second-worst quarter in 18 years” and “its worst quarter since the second quarter of 2013.”

Though the metal may see some occasional spikes, we expect it to mostly remain subdued throughout 2017. Gold normally serves as a safe investment in a volatile market. So, recovering global economic outlook does not bode well for gold’s appeal.

The Fed has also projected three more rate hikes for 2017. The greenback is hovering around a 14-year high level, which in turn will likely mar the demand for a non-interest bearing asset like gold (read: More Pain or Relief Ahead for Gold ETFs in 2017?).

What About Industrial Metal ETFs?

Investors should note that industrial metal ETFs could shine in 2017. One of the key reasons behind this is the recovery in China. The Chinese economy is one of the biggest users of industrial commodities. The country’s manufacturing sector recorded the quickest expansion in four years in December.

The private Caixin PMI was 51.9 in December, which came ahead of expectations and grew from 50.9 the previous month. Any reading higher than 50 indicates growth in activity. Investors should note that things were fragile for long in China given the protracted slowdown in the domestic manufacturing sector and credit crunch concerns. This turnaround was thus significant for the industrial metal space.

Not only China, there was an uptick in manufacturing activity in several other big economies including the U.S., Japan and the Euro zone. Manufacturing data in the Euro zone was the strongest since April 2011. Markit US Manufacturing PMI rose to 54.3 in December from 54.1 in November. The latest number marks “the highest value since March of 2015.”

Plus, with the U.S. president-elect Trump expected to bring U.S. manufacturing jobs back to the country and pledging fiscal reflation, the U.S. industrial sector is sure to benefit from his win (read: Manufacturing Reshoring Ahead? ETFs to Profit).

Given the bullish trend ahead for industrial activities globally, investors may want to consider cycling into the industrial metal space in 2017. For those investors, we have highlighted a few industrial metal ETFs that could be in focus ahead (see all industrial metal ETFs here).

iPath Bloomberg Copper SubTR ETN JJC

China is the world’s biggest consumer of copper, making up roughly 40% of the global demand for this industrial metal. The ETN tracks the Bloomberg Copper Subindex Total Return, which seeks to deliver returns through an unleveraged investment in the futures contracts on copper. The product charges investors 75 bps a year in fees. It trades at 80,000 shares a day on average.

iPath Bloomberg Ind Metals SubTR ETN JJM

The product looks to track theBloomberg Industrial Metals Subindex Total Return. The index has about 43% weight in copper followed by 24% in aluminum and 19.6% in zinc. The rest is invested in nickel. It charges 75 bps in fees and trades in a paltry volume of about 6,500 shares a day.

iPath Bloomberg Nickel SubTR ETN JJN

The product tracks the Bloomberg Nickel Subindex Total Return. The fund charges 75 bps in fees and trades at paltry volumes of 15,500 a day. 

PowerShares DB Base Metals ETF DBB

The fund looks to track the DBIQ optimum yield industrial metals index excess return plus the interest income from the fund's holdings of primarily US Treasury securities and money market income less the fund's expenses. The fund charges 82 bps in fees and trades in volumes of about 340,000 shares a day. The fund invests 34.6% of its weight in copper, 33.4% in zinc and 32% in aluminum.

iShares Silver Trust SLV

The fund looks to track the price of silver bullion. Investors should note that silver has high usage in industrial activities with about 50% of total demand coming from industrial applications. The fund charges 50 bps in fees and trades in volumes of about 10 million shares a day (read: Forget Gold; Buy Silver Mining ETFs Instead).

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ISHARS-SLVR TR (SLV): ETF Research Reports
 
IPATH-BB COPR (JJC): ETF Research Reports
 
IPATH-BB NCKL (JJN): ETF Research Reports
 
PWRSH-DB B METL (DBB): ETF Research Reports
 
IPATH-BB I MT (JJM): ETF Research Reports
 
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