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Is a Tough Time Ahead for Nickel ETFs?

Zacks Equity Research

Nickel took one lap after another in its bull run with strong support from all the drivers that have given the metal its star status in 2014. Overall, 2014 brought back the much-needed good luck for commodity investing which was hammered last year thanks to the rise in the greenback. Among the metals, nickel witnessed gigantic price gains of about 50% this year, obviously the best price appreciation for metals (read: 3 Commodity ETFs Still Looking Strong).

Earlier, two factors were in favor of the metal – Indonesia export ban and Russian-Ukraine tension. Subsequently, China’s likely move to shore up its financial markets as well as disruption in production at a Vale plant in New Caledonia lifted the metal price to a 27-month high level on May 12, as per Bloomberg.

Latest Drivers in Detail

A key reason for robust trading in this corner of the investing world is some good news out of China which remains the key consumer of nickel. Per sources, China will build commodities-trading tools, loosen ceilings on some foreign investment and broaden quotas for capital flow.

A certain raise in stimulus measures in China basically bolstered the price of nickel in the hope that these initiatives will in turn stimulate the nation’s industrial output and thus the usage of nickel.

On the other hand, Vale announced a cease in production in its New Caledonia unit following an acid spill, which added to the already heightened supply concerns. Investors should also note that it has been over four months since Indonesia last permitted any nickel ore export.

Notably, Indonesia is the world's biggest producer and exporter of nickel, and accounts for about 20% of global supply (read: Why Nickel ETFs Might Be a Great 2014 Investment).

Then comes the Russia factor. The nation, which takes the second position in terms of nickel production, has made headlines globally this year thanks to its intrusion in Ukrainian territory and the ensuing face-off with the West.

The Western nations have imposed some sanctions against Russia as a protest of its Ukraine intrusion and analysts see more economic sanctions in the cards if Kremlin does not change its course.

Can the Uptrend Continue?

Things should turn in the opposite direction as weak industrial production and property data for China in April raised doubts on how far the recent flexibility in foreign investment will boost the price of nickel. The Vale plant too will resume ‘shortly’, per the Bloomberg data.

Russia-Ukraine issues are also less likely to be far-fetched given the protests that Kremlin is facing from major global powers. All these factors, if materialized, will likely block the road ahead for nickel (read: Tough Times for Nickel ETFs?).

At present, the relative strength index of JJN is hovering at 82 – overbought territory – hinting that the product may succumb to a correction if any of the underlying drivers falls off the track. In fact, investors have already started to dump the metal. It fell more than 6% on May 14 given the stretched valuation.

Market Impact

These factors imply that the supply-crunch issues which had set nickel on fire were blown up by investors. The product had seen enough of a bull run.

Currently, there are two ETNs available in this space and could be in focus in the days ahead, especially by those who are already invested in the metal.

iPath Dow Jones-UBS Nickel Subindex Total Return (JJN)
This ETN tracks the Dow Jones-UBS Nickel Subindex Total Return. The index delivers returns through an unleveraged investment in the futures contracts on nickel and currently consists of one futures contract on the commodity (See more ETFs in the Zacks ETF Center).
The product is a bit expensive as it charges 75 bps in fees per year. It trades in a paltry volume of nearly 15,000 shares on an average daily basis that increases the trading cost in the form of a wide bid/ask spread.

The fund was once unpopular but is slowing gaining popularity this year. Presently, it has amassed about $16.8 million in assets. The ETN is up over 40% year-to-date, but lost 6.17% on May 14. JJN currently has a Zacks ETF Rank of 2 or Buy rating with a High risk outlook.
iPath Pure Beta Nickel ETN (NINI)

This note looks to track the performance of the Barclays Capital Nickel Pure Beta Total Return Index. Unlike many commodity indexes, this product can roll into one of a number of futures contracts with varying expiration dates, as selected, using the Barclays Pure Beta Series 2 Methodology.

This approach might result in less contango, which could prove crucial, as shifting from month to month in contracts can eat away at returns during an unfavorable market situation.
Further, the ETN manages about $8.6 million in its asset base and it sees light volume of less than 4,000 shares a day, suggesting a wide bid/ask spread. It charges an annual fee of 75 bps per year. This note added about 38% in the year-to-date time frame but was down 6.47% on May 14. NINI currently has a Zacks ETF Rank of 2 with a High risk outlook.

Bottom Line

Though nickel might not be a good candidate for investment, at least for the near term, it could be bet for the longer term. We suggest investors not to enter the nickel space at this moment; rather they might wait on the sidelines and look for some better entry points as the space still has some solid fundamentals. For those investors who have already invested in nickel and are only in it for the short term, the time to book profits and go away has probably come.

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Read the analyst report on JJN

Read the analyst report on NINI

Zacks Investment Research

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