Copper ETF: A Rundown
Copper has never been seen as a particularly attractive metal when compared to its more glamorous, platinum and gold. However, its uses are far more varied than you might imagine. Copper is a vital component in the production of many types of technology and everyday household items. In addition, it’s heavily used in piping, wiring and other construction materials. As a result, investing in Copper can be highly lucrative depending on the direction the economy is moving and with its relatively low cost in comparison to precious metals, more accessible to the small investor. The copper ETF is an investment you may want to look into. While you are at it, check out the Basics of ETF Investing to give you even more in-depth knowledge.
In addition to the industrial uses for Copper, it is becoming increasingly regarded as a potential currency base. At present, the US and China are the largest consumers of Copper with China also accumulating large amounts of Copper bullion over and above the amount it requires for industrial purposes
Copper Investment Options
As with all metals the original way to invest was to purchase an amount of the raw material, in this case Copper bullion bars and many traditional investors are still very attached to the concept of being able to touch what you own. However, purchasing a large quantity of any kind of metal is obviously going to create problems as it is heavy and needs to be stored in a secure location.
A much better alternative is to invest in an Exchange Traded Fund or ETF. This is a relatively new type of financial instrument that is now traded on the New York Commodity Exchange or COMEX. ETFs are very easy to trade as they have relatively high liquidity and low transaction costs.
An ETF is a collection of investments packaged together as one financial instrument, very similar to the way a fund works. The value of the ETF changes based on the aggregate change in the different Copper related investments held in the ETF which, in turn, are driven by the direction in which the price of Copper is moving.
Types of Copper ETFs
There are two main types of Copper ETFs available at the moment. The most actively traded is the iPath DJ-UBS Copper TR Sub Index more commonly known as the JJC. The aim of the collection of assets contained in this ETF is for it to perform in line with the Dow Jones-AIG Copper Total Return Sub Index which tracks and in general leads the overall Copper prices worldwide.
The other type of Copper ETF is based on the mining of Copper. Copper mining ETFs are composed of investments in areas strongly related to the mining of Copper rather than just the bullion. However, changes in the price of Copper will affect ETFs focused on the Copper mining industry as much as those related to bullion.
There are two main Copper mining ETFs they are:
- First Trust ISE Global Copper Index Fund (CU)
- Global X Copper Miners (COPX)
Both of these ETFs are focused on Copper mining, use the Solactive Global Copper Miners Index as their benchmark and have roughly the same amount invested in similar geographical regions. Despite this, they do perform slightly differently based on the assets within them. COPX tends to be more volatile than the CU and has greater increases and decreases in value.
Key Risks Involved with Copper ETFs
As with everything to do with the financial markets there is an element of risk involved, and Copper ETFs are no exception. Copper demand is still exceeding the supply of mined Copper, and as a result there is a huge secondary market in the recycling of copper to try and keep up with demand and as a result the value generally remains good.
The key risk with investing in Copper is that it is inextricably linked to the state of the economy as most of the primary uses of Copper are in manufacturing and construction. When the economy is in a down cycle there tends to be less of both and Copper prices fall. Conversely, the value of precious metals such as gold and silver tend to rise when times are tough as investors move to safer havens for their money. As a result if you wished to run a portion of your investments permanently in metals you could switch between different metal investments depending on the economic indicators.
The other risk associated with Copper being used in so many daily items is that there is always a chance that a synthetic substitute will be developed for some of its uses thereby reducing the demand for Copper and affecting its long term investment prospects. With an ETF investment however, selling your Copper holdings is very straightforward.
Investing in Copper but Not All the Way
If you are interested in investing in Copper, but would like to diversify your risk somewhat, there are a couple of ETFs that offer some exposure to Copper but also have holdings in other metals. The most popular of these is the Powershares DB Base Metals (DBB) which is invested equally in Copper, Zinc and Aluminium. For even more diversified risk there is the ELEMENTS RICI Metals Total Return (RJZ) that has equal holdings in 10 different types of industrially used metal including Copper. The more diversified ETF will not offer the same potential returns as a pure Copper ETF but will mitigate some of the risk.
The important part of investing is diversifying. The phrase “Don’t put all your eggs in one basket” should stay at the top of mind when looking into any new profit-making venture. You want to diversify because all of your investments balance each other out. Not to mention, you can have some you keep for the long term and others you use for quick surplus. However, the copper ETF is something that can be a stable commodity. To help advance your knowledge, these Udemy courses Investing Fundamentals and Buying, Selling and Storing Precious Metal help to give you a good advantage. This Udemy article, Return on Investment Formula: How to Calculate ROI on any Investment or Purchase will help you calculate how well your ETF is working for you.
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