Copper ETF: Industrial Metal with Inflation Hedge Potential

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Copper is one of the most widely used industrial metals. Its high conductivity of electricity means it is also used in consumer electronics. Copper is also used widely in wind energy generation and electric vehicles. However, owning physical copper as an investment isn’t easy. Probably the easiest way to gain exposure to copper returns is through a copper ETF.

We are going to have a look at three copper ETFs, their characteristics, and their recent and past performance. Let’s first have a look at the characteristics of copper, and why it may become more valuable over time.

If you are considering investing in copper, you probably already have an idea of the metal’s use in various industries. However, to understand the use society has for copper, let’s take a deeper look. The pie chart below shows the usage of copper in various industries.

Source: Geology.com

More importantly, is the direction copper demand is expected to go. Experts see copper demand increasing annually by 1% to 5.3% through 2025, driven mostly by demand in electronics, renewable energy, and automotive sectors. If the trend continues demand could outgrow supply resulting in a deficit by 2025.

Copper as an Inflation Hedge

The first use of copper dates back several thousands of years before Christ and is one of the first metals we know was used for ornaments and money. From the industrial revolution onwards, we have found many more uses for copper. 

So, it seems safe to say, given copper’s high use and application in a variety of industries, that demand is here to stay. If, as mentioned above, demand outmatches supply then this metal may see a sharp price increase.

Inflation is created by excess demand compared to supply, i.e., people want to buy more electronics, more electric-powered vehicles, etc. As the demand for these products increases, and they all need copper, so too will the demand and price increase for copper.

Why a Copper ETF?

Commodities are known in general to potentially hedge against inflation. This is because often they are the basic resource that makes up the products and items that are included in an inflation basket. The typical investment vehicle for institutional investors is futures, in fact, most commodity ETFs will invest through futures contracts.

So, for a copper ETF, the most effective investment vehicle is copper futures. However, a popular option for copper investing in the realm of copper ETFs is the Global X Copper Miners ETF (COPX: NYSEArca). The fund is the largest for assets under management, with $1.8 billion at the time of writing. We’ll have a closer look at this fund further down.

However, this type of fund invests in miners, who would benefit from any price increase in copper. But they also carry other risks, such as management, or rising extraction costs. Most of the companies that mine copper also mine other ores, such as iron or bauxite. Mining other metals greatly dilutes your exposure to copper prices.

The most effective pure play on copper investing is with a copper ETF that only invests in copper futures. You may be thinking why not hold physical copper, similar to the gold ETFs that invest in physical gold. The reason is simple, a ton of copper is worth a tiny fraction of a ton of gold. Storage space for copper would be hundreds of times greater than it is for gold.

How Do Copper ETFs Operate?

Copper ETFs that use futures contracts allow investors a simple and cost-effective way to gain exposure to copper returns. The futures market for copper contracts is very liquid and offers an efficient way for funds to manage their positions in copper. The table below shows the daily copper futures volume on the COMEX exchange.

Source: CME

Copper ETFs will necessarily buy new futures contracts as the current futures contract gets close to expiry. This management of futures contracts is known as rolling over. Relying on fund managers to perform this operation also allows investors to focus on more important things in life.

Roll Over Contango & Backwardation

Contango implies a futures curve that has a positive incline of prices as you get further away from the current date. Backwardation indicates a curve that has a negative incline in prices. This aspect of a positive or negative curve can add or detract yield to a fund’s return. 

When a futures curve is in backwardation, the fund sells the current contract at a higher price than the contract it buys. The price difference is positive and generates a positive roll yield. While the opposite is true when a curve is in contango, a fund will sell the current contract at a lower price compared to the new contract. In this case, generating negative roll yield.

Just to be clear, regardless of contango or backwardation, if the price of copper rises over time the performance of a copper ETF should benefit and generate positive returns.

Advantages of a Futures Backed Copper ETF

• Direct exposure to copper prices and returns.
• No exposure to corporate risk or non-copper mining activities.
• Investors can invest in futures using professionals and their know-how.
• No need to set up and maintain a futures account.
• High level of liquidity offered by exchange-traded products.

2 Futures Backed Copper ETFs

Let’s have a closer look at two copper ETFs that are currently available in the US. Both funds only invest in copper futures. However, they have different approaches when applying their investment strategies. 

United States Copper Index Fund, LP (CPER: NYSEArca)

This copper ETF invests in copper futures quoted on the COMEX exchange as defined by rules set out by Summer Haven Index Management LLC. Holdings are comprised of one or three eligible copper futures contracts. 

The strategy is rules-based as defined by Summer Haven, and positions are rebalanced monthly. The strategy tries to minimize the effects of contango and maximize backwardation by utilizing liquid contracts of the copper futures curve.

Below is a table of the fund’s holdings. The fund also holds short-term treasury notes and cash-like products. The current estimated yield from these positions is 0.71%. The fund has an expense ratio of 0.88%, and currently holds net assets of $218.8 million.

Source: USCF Investments

The YTD of the fund is -4.1%, while over the past two years the fund has returned a positive yield of 71.88%. Since the fund’s inception in November 2011, the fund has returned 6.84%. The volatility of copper ETFs is lower than other single commodity ETFs such as Natural Gas ETFs.

The 20-day volatility for this fund is 24.74%, while the 200-day volatility is 23.83%. 

Source: YahooFinance

iPath Series B Bloomberg Copper Subindex Total Return ETN (JJC: NYSEArca)

This Copper ETF invests in the high-grade copper futures contracts that comprise the Bloomberg Commodity Index Total Return. The fund currently holds $93.5 million of assets under management, which is small relative to its peers. The expense ratio is 0.45% considerably lower than the CPER copper ETF.

The lower expense ratio may explain the slightly better performance over the past 2 years than the CPER ETF. JJC has had a positive return of 73.94% over the past two years compared to 71.88% for CPER. While the YTD for JJC is at -4.1%. 

Source: YahooFinance

Global X Copper Miners ETF (COPX: NYSEArca)

Although this fund is not a pure play in copper, it is by far the largest ETF that targets exposure to copper prices. The fund holds $1.8 billion in net assets. It has 45 million shares outstanding, which creates a large amount of liquidity when it comes to the entry and exit of your investment.

The expense ratio is 0.65% which seems in line with the industry average. For volatility the Global X ETF website states that this copper ETF has a Beta of 1.66 to the S&P 500, and a standard deviation of 40.9%, using annualized 3-month returns. This seems considerably higher when compared to CPER and JJC, which both have a Beta of 0.74 to the S&P 500.

The 2-year performance of this fund is almost double the returns from the futures-backed ETFs. This is probably due to the type of investments made. Since COPX invests in stocks the fund has picked up stock returns and not only copper returns.

The YTD for this copper ETF is 5.17%, while over the past two years the fund has returned 161.77%. The return since the inception of the fund in November 2011, is negative 10.26%. The fund aims to match the returns of the Solactive Global Copper Miners Total Return Index. 

Source: YahooFinance

COPX Holdings

Below is a table of holdings for this copper ETF. We can see that some of the largest are companies such as Glencore, Teck Resources, and Grupo Mexico. All of which are heavily involved in the extraction of other metal ores. 

The selection of stocks has allowed the fund to outperform its peers, over the past two years, that invest in copper futures. However, if you believe the stock market may be heading south then this might not be the best play on copper. 

True that even in a bearish stock market, some of the stocks this fund invests in may still offer positive returns. But they still are stocks and subject to the volatility the broad stock market can create.

Source: Global X ETFs

Regulation

None of the ETFs mentioned above are regulated under the Investment Company Act of 1940 and do not offer any of the protections that come with the 40s Act regulation. These funds should issue a schedule K-1 which you will need for your tax claim. Speak to your tax advisor for full information on holding these securities.

Conclusion

The demand for copper comes from various industrial and manufacturing needs. Given its physical characteristics and the rising use of electronics, electric cars, and renewable energy generation the demand seems likely to remain high.

Copper also has relatively low volatility, which helps smooth out returns so you are probably less likely to see large swings in your portfolio. Adding a variety of assets to your portfolio helps bring down the overall risk. 

Risk reduction comes from uncorrelated returns across asset classes. The returns of cryptocurrencies, real estate, commodities, and precious metals have low or negative correlations to the returns of stocks. They often also have a low correlation of returns among each other, further reducing the overall level of risk for your portfolio.

You can hold these assets in a Self-Directed IRA to take advantage of a tax-enhanced environment. Several companies offer professional and specialized services, you can read our reviews on the Top Self-Directed IRA Companies here.