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No Gains on Chile for Copper ETFs; Global Ills Spoil Sport

Zacks Equity Research

Like several commodities, copper prices have been slouching for long. The metal saw a troubled 2014 and 2015 too hasn’t brought any respite. The Chinese economic slowdown, global growth worries, a multi-year high greenback and a supply glut made this metal to hit the dirt.

China matters the most for this metal as the country is the world’s biggest consumer of this industrial metal, making up roughly 40% of the global copper demand. Thus, the recent global market rout induced by hard landing fears in China made the journey of copper extremely tough.

However, things started to look a little brighter for the red metal with a massive earthquake in Chile which accounts for nearly one-third of the world’s total copper output. The calamity spurred fears of a supply crunch.

Chile has a huge hoard of copper. Chile’s government also owns and operates Codelco, the largest copper producing company in the world. A very big earthquake in Chile halted operations in a few mines and the resultant Tsunami broke a small port.

As a result, copper prices that plunged to a six-year low this year managed to recoup a little and hit a two-month high last week. Moreover, the recent spate of policy easing in China and expectation for further stimulus, if needed, should bring some much-needed relief for the metal.

The Chinese stimulus should bring the waning manufacturing sector back to life and in turn boost the demand for this industrial metal (read: Will the China Stimulus Boost Copper ETFs This Quarter?).

To reflect these gains, exchange traded products like iPath DJ-UBS Copper TR Sub Index ETN (JJC), iPath Pure Beta Copper ETN (CUPM) and United States Copper Index Fund (CPER), which are almost 14% down so far this year, have added 1−1.8% returns in the last five trading sessions (as of September 17, 2015).

However, the gains were extremely short-lived. On September 18, most copper-related exchange traded products registered a retreat.  

What Restrained Copper’s Ascent?

Proving the popular market theory wrong, a dovish Fed meeting went against the copper prices. The Fed maintained its dovish interest rate policy in the key September meeting which was earlier viewed as the most likely month for the lift-off. Normally, such a situation cools off the greenback and favors the broader commodity market investing including copper.

But this time around, the Fed held itself back from raising key rates (almost after a decade) mainly due to global growth concerns which can anytime put off the American growth momentum. This very apprehension failed to offer the fresh lease of life that this hard metal needs. Most copper-related products were in deep red on September 18.

In any case, investors should note that the latest earthquake-induced jump in prices was likely to be short term in nature. The destruction in the mines was not serious and major copper export ports are in workable condition. So like most analysts we too do not believe that the supply crunch will last long.
Below we detail copper and the related mining ETFs, which could see more losses in the coming days and should be avoided despite the Chile earthquake and a softer dollar (see all Industrial Metals ETFs here).
United States Copper Index (CPER)
This fund offers investors exposure to an index composed of copper futures contracts on the COMEX exchange. The index looks to maximize backwardation and minimize contango while utilizing contracts in liquid portions of the futures curve.
The product has over $2 million of assets under management, while its expense ratio comes in at 65 basis points a year. The fund has a Zacks ETF Rank #3 (Hold) with a high risk outlook. The fund is down 12.7% so far this year but added about 1.8% in the last four trading sessions (as of September 17, 2015). However, the fund was down over 4% on September 18 (read: 6 ETFs to Watch in September).

iPath Dow Jones UBS Copper ETN (JJC)

This ETN offers investors exposure to front month copper futures tracking the Dow Jones UBS Copper Index. The note has over $41 million of assets under management, while its expense ratio comes in at 75 basis points a year.

Though the product is easily the most popular, investors should note that, as an ETN, JJC carries with it the credit risks of Barclays, though an ETN will have no tracking error. The fund was up over 1% in the last five trading sessions and has a Zacks ETF Rank #3 (Hold) with a high risk outlook. JJC retreated over 4.1% on September 18.

Global X Copper Miners ETF (COPX)

This $20 million-ETF is an equity option for copper investors, tracking the Solactive Global Copper Miners Index. This benchmark holds 27 stocks in its basket, while it charges investors 65 basis points a year in fees for the exposure.

The ETF has a definite skew toward smaller securities as large caps account for just one-third of the total. Investors should note that miners mostly play a leveraged role to the underlying index. The fund was up 4.6% in the last four trading sessions (as of September 17, 2015) but is down over 28%. COPX lost about 4.4% on September 18.
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