JP Morgan, the Wall Street firm that has slowly worked its way into the ETF market, could be one step closer to listing a copper ETF on the NYSE Arca platform if the latest round of paperwork hitting the regulatory pipeline is any indication.
This month, the New York Stock Exchange filed paperwork requesting exemptions it needs in order to have the JPM XF Physical Copper Trust go on its board. The fund would be only the market’s second copper ETF, but the first to serve up exposure to the copper market through a physically backed portfolio.
Just recently, United States Commodity Funds launched the futures-based United States Copper ETF (CPER - News), which put in an ETF wrapper a strategy that had until November only been available in ETNs such as the $2.48 million iPath Pure Beta Copper ETN (CUPM - News) and the $209.5 million iPath Dow Jones UBS-Copper Total Return ETN (JJC - News).
Copper is directly linked to the infrastructure sector where it’s widely used for electrical cables and grids as well as for telecommunications platforms. The copper market has benefited from growing demand from emerging markets such as China, which alone consumes nearly 40 percent of the global copper supply, and has caught investors’ attention.
“Going long copper is a way to express a view that you think the global real economy is going to do OK without having to make the concurrent bet that the financial markets will also do well,” John Hyland, chief investment officer at United States Commodity Funds, said in an interview.
Hyland said that betting on industrial metals, such as copper, is also a way of hedging a portfolio against inflation and a falling U.S. dollar because, historically, copper prices are positively correlated to inflation, and that correlation is even more prominent to a weakening dollar.
“Higher inflation, in combination with continued real-world GDP growth, could very well help copper investments while at the same time hurting stocks and bonds,” he said.
Physically Backed Vs. Futures Based
The JP Morgan copper ETF will give investors exposure to the spot price of copper of the London Metals Exchange. The trust will hold copper in warehouses located in the Netherlands, Singapore, South Korea and the U.S., according to the most recent filing.
By comparison, U.S. Commodity Funds’ CPER invests in futures contracts; namely, the cheapest monthly Comex copper futures contracts over an 18-month span. The fund has gathered $2.56 million since inception.
CPER’s design takes to heart the problem of contango, which is when the soonest-to-expire contract is the cheapest in the futures curve causing fund managers to have to pay up as they roll the position into another contract upon expiration. Contango eats up returns over time.
Contango can also affect whether owning copper through a futures-based fund is a more prospective idea than buying a physically backed fund, and that’s a constantly moving target, Hyland said.
“Right now, the NY copper futures market is mildly in contango in the front of the curve while moving into backwardation some distance out,” Hyland said. “If you bought the front-month contract and rolled it, the annualized ‘cost’ of contango is running about -1.6 percent.”
By contrast, if a physical ETF bought spot copper and stored it—as JP Morgan’s fund plans to do—assuming it costs around 35 cents per ton per day to store the metal in an LME warehouse, that annualized cost would be -1.8 percent, Hyland estimated.
Still, the comparison wouldn’t be fair without taking into account how much each ETF costs, something that’s still unknown about JP Morgan’s fund, as well as without knowing the annualized cost of actually buying and selling futures contracts or physical copper.
“CPER’s annual commissions are running around 8 basis points,” Hyland said. “I have no idea what to assume for the physical copper ETF. It could be zero, or it could be a different and much higher number.”
JP Morgan has yet to disclose its planned fees for the fund, something that can also be said about San Francisco-based iShares’ planned physically backed copper ETF currently in the regulatory pipeline.
When Will It Launch?
When will the JP Morgan fund actually launch? It remains to be seen.
Every time an exchange wants to list a commodities-based, currency-based or actively managed ETF, it has to file a form 19b-4 to comply with SEC rules under the Investment Act of 1934. Equities and bond ETFs no longer suffer the same scrutiny because the SEC has already implemented a “generic” exemption for those types of funds.
The rule requires exchanges to file this extra paperwork for any security that is either a derivative or a hybrid whose value is based on the performance of an underlying benchmark.
The form in question essentially says that the ETF will behave like an ETF should by publishing indicative NAVs throughout the day as well as an NAV at the end of every day, and by keeping its holdings transparent, among other things.
The regulatory hurdle is a band-aid solution regulators have put in place to allow ETFs to fit in a set of trading rules that was originally designed for closed-end funds and ordinary corporations.
Having the NYSE submit its form 19b-4 is only part of the process it takes to get the JPM XF Physical Copper Trust to go live, however. The other half of the puzzle is getting the prospectus for the fund approved by regulators, something that JP Morgan has yet to do.
In its last filing detailing its plans for the fund back in July, the company didn’t disclose planned fees or storage costs involved with holding physical copper, and other data deemed critical if the SEC is to give the ETF a green light.
“If a prospectus is not showing all the data, we still could have months to go before an ETF comes to market,” Hyland said of the procedure.
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