Physically-Backed Copper ETFs Still Waiting in the Wings
October 3rd, 2012 at 7:00am by Tom Lydon
Physically-backed copper exchange traded funds could help support rising prices of the metal if the products eventually launch. Between J.P. Morgan and BlackRock, the two providers could take about 200,000 tons of copper out of the market.
“Over a year ago, JPMorgan Chase (NYSE: JPM) filed a request with the Securities and Exchange Commission (SEC) for permission to launch a physically backed copper exchange-traded product (ETP). That idea was met by an immediate wave of criticism from end users, such as manufacturers of copper wire and copper merchant companies, which argued that such a fund would seriously deplete the global supply of a critical industrial metal. They feared the resulting shortage would drive global copper prices to unaffordable levels,” Ben Shepherd wrote for Investing Daily.
The physically backed metal ETF is an idea that has gained momentum with the success of the SPDR Gold Shares (NYSEArca: GLD). The fund has about $75.2 billion in AUM and has an expense ratio of 0.40%. Competitors are now trying to get in on launching physically backed metals funds, however, the introduction of such ETFs also cuts into the supply chain.
The U.S. copper market would take a supply hit if these funds were to be approved by the SEC. That would create a scenario in which the actual end users of copper must suffer the depredations of speculators who have no interest in ever taking delivery of the commodity they’re trading, reports Shepherd. Critics claim that the global market would absorb the metal lost to investment in the U.S. [Copper ETFs Face Key Test]
In turn, the share price of the fund wouldn’t accurately reflect the price of the commodity in any single market. The risk is that the funds would become more expensive to run, and this expense would be passed down to the investor. Furthermore, copper industry trade groups are not supportive of physically-backed ETPs focused on the metal, unlike the World Gold Council that helped create physical gold funds.
For now, investors will have to trade the iPath Dow Jones UBS Copper Subindex Total Return ETN (NYSEArca: JJC), a note that touts $35 million in assets under management. It’s designed to track copper futures.
iPath Dow Jones UBS Copper Subindex Total Return ETN
Tisha Guerrero contributed to this article.
Full disclosure: Tom Lydon’s clients own GLD.
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