Trend 1: Small Caps Kicking You-Know-What

Small-cap ETFs are dusting large caps. The primary reason? History. In recovery periods, small-caps tend to lead the way toward the light. They’re smaller and quicker to react to shifts in economic and market conditions. Large companies have lots of flag poles up which to run various matters and issues, leaving big changes in strategy to get caught in bureaucracy. In the last month, small-caps are up about 11%, vs. about 7% for large-caps and 8% for mid-caps. [The Case for Small-Caps in 2010.]

• Rydex S&P SmallCap 600 Pure Value (NYSEArca: RZV)
• WisdomTree SmallCap Dividend (NYSEArca: DES)
• iShares S&P SmallCap 600 Growth (NYSEArca: IJT)

Trend 2: What’s the Beef with Fixed Income?

Even we have sounded the alarm: fixed-income could get hit as the Federal Reserve hikes interest rates. And that’s still true. But right now, it’s copacetic; there’s been a lot of bark with no bite yet in sight. Yields continue to be appealing in certain areas, too. For example, the SPDR Barclays Capital High Yield Junk (NYSEArca: JNK) is yielding 12.2% right now. Long-term Treasuries will get beat in a higher interest rate environment, but short-term Treasuries and corporate bonds have been fine. Have an exit strategy in place if and when that changes, though. [8 ETFs That Can Add Income to Your Portfolio.]

• iShares iBoxx $ High Yield Corporate Bond (NYSEArca: HYG)
• Vanguard Short-Term Bond (NYSEArca: BSV)
• SPDR Barclays Capital Short-Term Corporate Bond (NYSEArca: SCPB)

Trend 3: Base Metals Heat Up

The “shiny” metals are out; base metals are in. The stars seem to have aligned for a possible rally in base metals: China is growing, building and importing base metals faster than they can be used in new skyscrapers; other emerging markets are also building and importing metals; the auto market is slowly recovering, lending support for a rally in platinum and palladium and the U.S. housing market is recovering in fits and starts. All this building and recovery means more demand for copper, platinum, steel and other building blocks of construction at home and abroad. [Why Metals ETFs Are Leading the Charge.]

• PowerShares DB Base Metals (NYSEArca: DBB)
• iPath DJ-UBS Copper ETN (NYSEArca: JJC)
• ETFS Physical Platinum (NYSEArca: PPLT)

For more stories on spotting trends and acting on them, read our special report on trend following.

The First Trust ISE Global Copper (NASDAQ: CU) and First Trust ISE Global Platinum (NASDAQ: PLTM) give investors the first exposure to platinum and copper equities in an ETF form.

Until now, copper exposure was available in an exchange traded note (ETN) via iPath Dow Jones UBS Copper (NYSEArca: JJC) or as a component of the PowerShares DB Base Metals (NYSEArca: DBB), which is 40% copper futures. [Why Metals ETFs Are Leading the Charge.]

Platinum exposure is available through the popular ETFS Physical Platinum (NYSEArca: PPLT), as well as through ETNs such as UBS E-TRACS Long Platinum (NYSEArca: PTM), UBS E-TRACS Short Platinum (NYSEArca: PTD) and iPath DJ-UBS Platinum (NYSEArca: PGM).

Mark Abssy, index and ETF manager at ISE, says the indexes behind the copper and platinum funds were developed in 2008 as investor interest in the ISE and First Trust natural gas ETF, First Trust ISE-Revere Natural Gas (NYSEArca: FCG) was gaining momentum. Commodities were also becoming a part of more and more headlines, leading ISE to think about other commodities that might be of interest to investors. “We were thinking along those lines – what can we help investors get exposure to?” Abssy says. “The first two we came up with were platinum and copper.” [Platinum and Palladium Price Drivers.]

The market cap minimum of $75 million is admittedly low. The reason, Abssy says, is that when considering  mining stocks, there are a number of companies still in the exploration stage, but have yield estimates based on geological surveys. “Much of their valuation is tied to the value of the commodity,” he says. Those companies tend to be more sensitive to underlying commodity price action, offering more direct exposure to the underlying commodity than fully functioning mines. [Your Guide to Investing In Metals ETFs.]

In the copper fund, the country allocations are Canada, 42%; Great Britain, 22%; Peru, 9.3%; Australia, 7%. There are also holdings in Russia, Turkey and other areas. If you’re surprised that Chile isn’t on the list, there’s a reason for that. Abssy acknowledges that while Chile is a major copper producer, many of the names already held in the underlying index already have major properties in Chile. Also, many of the major Chilean miners are still privately held. [The Impact of Chile's Earthquake.]

“There are many cross-deals in the mining industry,” Abssy says. “You wouldn’t necessarily think that a tiny company is connected to a large one, but the industry is like a big extended family.”

The platinum country breakdown is South Africa, 29%; Canada, 25%, Great Britain 17%. Other countries appearing in smaller amounts include Australia, Russia and a few U.S. names.

The outlook for both the platinum and copper markets looks to be on the bullish side of things as the domestic and global economies recover even further:

• Auto demand might be tepid now, but it’s showing signs of reviving.
• Ryan Issakainen, an ETF strategist at First Trust, also points out that when you combine the rate of cars being scrapped to the rate of population growth, it’s potentially a formula for an increase in auto sales and production in the United States alone. Auto demand in emerging markets is also becoming more robust.
• There are also tightening emissions standards; platinum and palladium are key components of catalytic converters, and can’t be substituted with any other metal.
• There are trace amounts of platinum group metals (PGMs) found in smoke detectors, airbags, computer hard drives and they’re heavily used in the pharmaceutical and cancer research industries, as well.
• On the copper side, a Barclays study recently projected that by the end of 2015, 1.5 billion Chinese citizens would each be using 12 pounds of copper – “astronomical when you think about the relatively tight supplies of copper,” Issakainen says.
• Copper is also a major component in new buildings – it’s heavily used in wiring and pipes, two things any modern buildings can’t get by without. “Copper is used very heavily in the emerging markets buildup,” says Issakainen.

Both funds have an expense ratio of 0.70%.

For more stories about copper and platinum, visit our categories.

After ETF Securities‘ popular funds launched, platinum and palladium prices surged to highs:

Graphic courtesy of the Wall Street Journal.

And get ready: there’s another platinum-backed ETF in the hopper from the provider, which would be a basket of precious metals that include gold, silver, platinum and palladium. For that reason, prices for platinum and palladium are likely headed higher in the longer term, says Matt Whittaker for The Wall Street Journal. [Other Metals Sparking Interest.]

The metals markets are hot right now, and even as gold prices climb, the demand for platinum and palladium is still high even when you discount the existence of these ETFs. The supply-and-demand chain is favoring fundamentals behind the metals, which are used primarily by the auto industry for catalytic converters. Auto sales in February revealed that many automakers had improvements in their sales.

There are also narrow supplies and production issues in South Africa, which is one of the world’s foremost platinum producers. [What's Driving Platinum and Palladium Prices?]

At more than $1,500 an ounce, platinum is well above the lows it hit in 2008, when it dropped below $800.

For more stories about platinum, visit our platinum category.

• ETFS Physical Palladium (NYSEArca: PALL)

• ETFS Physical Platinum (NYSEArca: PPLT)

An increasing federal deficit coupled with a large decline in the U.S. dollar may eventually translate into rapid inflation and higher metal prices, while the dollar’s recent strength and higher interest rates could mean that precious metals will drop in value, comments Jonathan Bernstein for ETFZone. [Hedge Inflation With These ETFs.]

That’s why investors need to be prepared to act accordingly. Not all metals have a similar reaction to shifting market conditions.

ETFs offer exposure to precious metals such as gold, silver, platinum and palladium, and base metals like copper, nickel and lead. Precious metals are lightly counter-cyclical, affected by interest rates and the dollar, while base metals are highly cyclical, performing well in a strong economy. [4 Factors Influencing Metals ETFs.]

Commodity ETFs come in a variety of incarnations; which you choose is up to you. It depends on the kind of exposure you want, what kind of risk you’re willing to endure and taxes you’re willing to deal with.

Funds can be physically backed by the metal itself, it can have ownership of futures contracts to buy the metal, it can hold companies involved in the mining and production of a metal. [Copper ETN: Forging Ahead?]

A fund that is backed by the physical commodity has the metal stored in a vault. Investors should note that these funds have storage fees calculated into their expense ratios. Also, physical bullion trades are taxed by the IRS at the collectibles rate of 28% instead of the long-term equity rate of 15%. Investors should still consult their tax experts for specific advice, though. [What's Driving Platinum and Palladium ETFs?]

• SPDR Gold Shares (NYSEArca: GLD)
• iShares COMEX Gold Trust (NYSEArca: IAU)
• iShares Silver Trust (NYSEArca: SLV)
• ETFS Physical Gold (NYSEArca: SGOL)
• ETFS Physical Silver (NYSEArca: SIVR)
  
• ETFS Physical Platinum Shares (NYSEArca: PPLT)
• ETFS Physical Palladium Shares (NYSEArca: PALL)

Funds may also own futures contracts to buy the metal. Contracts are rolled over before expiration, and another contract is purchased in its place. Rolling over contracts generates trading fees. Futures contracts are taxed at a lower maximum rate of 23%.

• PowerShares DB Precious Metals Fund ETF (NYSEArca: DBP)
• PowerShares DB Base Metals Fund ETF (NYSEArca: DBB)
• PowerShares DB Gold Fund ETF (NYSEArca: DGL)
• PowerShares DB Silver Fund ETF (NYSEArca: DBS)
• Ultra Gold ETF (NYSEArca: UGL)
  
• ProShares UltraShort Gold (NYSEArca: GLL)
• ProShares Ultra Silver (NYSEArca: AGQ)
• ProShares UltraShort Silver (NYSEArca: ZSL)

Many metals ETFs give investors exposure to the companies that mine and produce the metals. While such funds don’t give you access to spot prices, they have their own advantages. One big one is that mining companies can continue to do well if a commodity’s price steps back, but remains far above the cost of production. Such funds also lack the big day-to-day swings that have a tendency to vex futures- and physically-backed metals ETFs.

• SPDR S&P Metals & Mining (NYSEArca: XME)
• Market Vectors Gold Miners (NYSEArca: GDX)
• Market Vectors Junior Gold Miners (NYSEArca: GDXJ)
• EGS DJ Emerging Markets Metals & Mining Titans (NYSEArca: EMT)

Lastly, funds may offer exposure through notes or exchange traded notes (ETNs). ETNs are taxed by the long-term equity rate of 15%. ETNs are unsecured debt backed by the full faith and credit of the issuer. They have no tracking error. [ETNs: Everything You Want to Know.]

• ELEMENTS Rogers International Commodity Metal ETN (NYSEArca: RJZ)
• E-TRACS UBS Bloomberg CMCI Industrial Metals ETN (NYSEArca: UBM)
• iPath DJ AIG Industrial Metals ETN (NYSEArca: JJM)
• PowerShares DB Base Metals Long ETN (NYSEArca: BDG)
• iPath AIG Copper (NYSEArca: JJC)
• iPath DJ AIG Lead (NYSEArca: LD)
• iPath DJ-AIG Aluminum (NYSEArca: JJU)
• iPath DJ AIG Nickel (NYSEArca: JJN)
• E-TRACS UBS Platinum (NYSEArca: PTM)
• iPath DJ AIG Platinum (NYSEArca: PGM)
  
• PowerShares DB Gold Short ETN (NYSEArca: DGZ)
• E-TRACS UBS Short Platinum ETN (NYSEArca: PTD)
• PowerShares DB Base Metals Double Long ETN (NYSEArca: BDD)
• PowerShares DB Base Metals Double Short ETN (NYSEArca: BOM)
• PowerShares DB Base Metals Short ETN (NYSEArca: BOS)
• PowerShares DB Gold Double Long ETN (NYSEArca: DGP)
  
• PowerShares DB Gold Double Short ETN (NYSEArca: DZZ)

For more information on metals, visit our precious metals category or base metals category.

For full disclosure, Tom Lydon’s clients own shares of XME.

Max Chen contributed to this article.

Investors are all over platinum these days; coupled with improving industrial demand and a tight mining supply, and it’s a recipe for a potentially long-term uptrend:

• South Africa’s mines are responsible for 80% of the world’s platinum output; margins are getting squeezed at some mines, and one solution could be to scale back production volumes.
• Auto sales are still tepid, but much improved. Platinum is a key component in catalytic converters, which help reduce emissions.
• ETF Securities‘ new ETFs are adding a new layer to demand for the metals; in just a few weeks, the funds have amassed more than $500 million in assets under management.

Platinum prices are up around 1% at $1,535 an ounce, with palladium 5% higher at $445 an ounce, well above 2009 lows of $920 and $180 respectively, says Matthew Curtain for The Wall Street Journal. [Why Platinum May Be the New Gold.]

What could put a dent in platinum and palladium’s shine? Look out for a rise in interest rates, which could damage the appeal of zero-yielding assets, such as metals and ETFs. There are also large stockpiles of palladium in Russia, which can be released as needed to keep the markets in equilibrium. [The "Other" Precious Metals.]

For more stories about platinum or palladium, visit out platinum category.

• ETFS Physical Platinum (NYSEArca: PPLT)

• ETFS Physical Palladium (NYSEArca: PALL)

• E-TRACS UBS Bloomberg Long Platinum ETN (PTM)

• iPath Dow Jones AIG Platinum TR Sub-Index ETN (PGM)

An analyst with HSBC recently noted what he sees are the top opportunities in the metals and mining sector. The Wall Street Transcript says that the places to go this year will likely be bulk commodities, such as iron ore, coal, thermal coal and metallurgical. [Metal and Mining Sector's Challenges.]

Coal presents an especially good opportunity, says the analyst. China is rapidly consumingcoal and iron ore, but they’re also two commodities in shortest supply. China’s demand is also such that coal can’t be produced quickly enough to cover it. [What Commodity ETFs Are All About.]

A similar rosy outlook for the platinum market is forecast, too. Last year, the group of six metals known as the platinum group metals (PGMs) outperformed gold and this year should bring more of the same, says Wong Eng Soon for the Business Times. A pickup in global auto demand, tight mine supply growth and more demand for investment are seen as being the primary drivers of any gains. [10 ETFs Advisors Like Most.]

For more stories about metals and mining, visit our metals and mining category.

• SPDR S&P Metals & Mining (NYSEArca: XME)

• Market Vectors RVE Hard Assets Prod ETF (NYSEArca: HAP)

• Emerging Global Shares Metals & Mining (NYSEArca: EMT)

• Market Vectors Steel (NYSEArca: SLX)

• ETFS Platinum Shares (NYSEArca: PPLT)

For full disclosure, Tom Lydon’s clients own shares of XME.

ETF Securities

ETFS Physical PM Basket Shares is set to be issued through a trust, which will be valued on the basis of London afternoon prices for gold, platinum and palladium and by the silver fix at approximately noon London time. The shares will trade on the NYSE Arca platform, says Matt Whitaker for The Wall Street Journal. [First Trust's Filing for an Equity Platinum ETF.]

ETF Securities’ filing follows several big happenings on the precious metals ETF front. The provider launched the first U.S.-listed platinum and palladium funds recently, and they’ve been given an enthusiastic reception from investors. Holdings in all the ETF Securities funds trading total more than $1 billion. [Read about the latest platinum and palladium backed ETFs here.]

Meanwhile, Global X has filed for a suite of mining ETFs aimed at copper, gold, platinum and silver. [More on the Global X Filing.]

For more stories about precious metals, visit the category.

The glowing success of the new precious metals tracking ETFs – ETFS Physical Palladium (NYSEArca: PALL) and ETFS Physical Platinum (NYSEArca: PPLT) – could catch the eyes of regulators, much the way that natural gas ETFs were scrutinized last year. [The Platinum ETF Draws Much Attention Now.]

Ian Salisbury for The Wall Street Journal reports that the Commodity Futures Trading Commission, the agency that has taken the lead in targeting energy speculators, has suggested it may look into metals in the future. [Commodity ETF 101.]

The key difference in the metals markets versus the energy markets is that the metals ETFs own actual amounts of physical metals, not futures contracts tied to them. This seemingly puts them outside the jurisdiction of the CFTC. Funds that are backed by physical metals have grown large – case in point, SPDR Gold Shares (NYSEArca: GLD) holds about $40 billion. [The CFTC's Proposal for Futures ETFs.]

For more stories about commodity ETFs, visit our commodity ETF category.

Global X Funds

So far, precious metals have been about as popular as emerging markets, especially within the ETF category. Daniel Tovrov for Mutual Fund Wire says the new funds filed for include: Global X Copper Miners, Global X Gold Miners, Global X Platinum Miners and the Global X Silver Miners ETFs. [Platinum and Palladium ETFs Are Hot.]

Precious metal ETFs have been luring assets left and right. Two of the  most popular funds in recent weeks are the new ETFS Platinum Shares (NYSEArca: PPLT) and ETFS Palladium Shares (NYSEArca: PALL), which together have more than $500 million in assets.

Global X currently has a line of ETFs that focus on sectors China, as well as single-country offerings aimed at the Nordic countries and Colombia. [More on Global X's China ETFs.]

For more stories about new ETFs, visit our new ETFs category.

Assets: ETF Securities, the provider of PPLT, announced that assets hit $372 million as of Feb. 1

Objective: To reflect the performance of the price of platinum, minus expenses

Holdings: PPLT is backed by platinum bullion bars held in both London and Switzerland

What You Should Know

• PPLT is currently the only U.S.-listed ETF that gives investors physical exposure to platinum
• All physical platinum in the fund is individually identified
• The platinum is inspected biannually by an independent auditor
• Bar numbers, pricing information and net asset value of the trust are available on ETF Securities’ website
• Has a 0.60% expense ratio
• The trustee is Bank of New York Mellon

The Latest News

• Analysts expect both platinum and palladium to have a stellar year in 2010 because of the increase in industrial production. The latest launch of the related ETFs will also put pressure on demand for the metals. [Why Platinum Is the New Gold.]
• The London Bullion Market Association forecasts that platinum prices will range between $900 and $2,578 an ounce this year, with an average of $1,550.
• Even when the West began thinking twice about buying any jewelry in the face of the economic crisis, China stepped in to buy large amounts at the lower prices. Much of the demand for platinum comes from the jewelry market, where fashion trends and economic factors have increased interest in the metal. [The Case for Platinum.]
• Platinum should get a lift from a recovering auto market. Car sales in China shot up by nearly 53% to 10.3 million in 2009, while total auto sales – including heavy commercial vehicles – rose 46.2% to 13.8 million units. Experts still expect the sector to post a solid year-on-year gain of 10%–15% this year.

For past ETF Spotlights, visit our page.