Playing Copper’s ‘Generational Shift’

The metal could see a renaissance as its importance has grown amid increased focus on decarbonization.

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Reviewed by: Heather Bell
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Edited by: Heather Bell

A “generational shift” may be coming to copper markets thanks to the net-zero energy trend, BNY Mellon’s Al Chua recently told CNBC. Investors may be curious to know how to participate as this unfolds. 

Copper is a crucial metal for green technologies. Goldman Sachs analysts have gone as far as labeling it “the new oil” and “the most cost-effective conductive material” in a research piece published in May. S&P Global last year projected that copper demand may double by 2035.  

While short-term demand is expected to strengthen as China’s economy reopens, global climate goals are likely to keep that demand high.  

“Every renewable energy pretty much needs copper, because if you’re talking about electrifying something and transmitting electricity, you need copper,” Chu said in the CNBC article. 

Playing Copper 

Four exchange-traded products—including two equity funds and two futures-based products—provide exposure to copper, and significant differences separate all of them. Since that Goldman research was published in May, the $1.9 billion Global X Copper Miners ETF (COPX) has pulled in more than $97 million, while both the futures-based products have seen outflows.  

That’s not shocking —investors can be fickle about futures-based products largely due to their complexity and inherent risks.  

The United States Copper Index Fund (CPER) has $154.6 million in assets under management and tracks an index that relies on an optimization process to select the futures contracts it rolls into in an effort to avoid the effects of contango. It comes with an expense ratio of 0.85% and is structured as a commodities pool.  

The $67.8 million iPath Series B Bloomberg Copper Subindex Total Return ETN (JJC) is structured as an exchange-traded note, tracking an index that weights contracts by liquidity and production. It has an expense ratio of 0.45%.  

Despite this, the two futures-based products exhibit fairly similar performance. Both are up about 7% year to date.  

New Addition 

Most recently, Sprott rolled out the Sprott Junior Copper Miners IETF (COPJ) at the start of February. That fund has very little in assets, but by targeting smaller-sized copper miners, it offers a slightly different perspective than COPX. These tend to be companies with a lot of growth potential because of their small size but also more risk because they are often not yet at the producing stage. As a result, they often fail.  

If you’re looking for relatively hassle-free exposure to the performance of copper, COPX is probably the best choice. It’s also the least risky of the four products. Unlike with COPJ, its holdings are all established producers. In fact, there is no holdings overlap between the top 10 holdings of the two funds.  

The two futures-based products, although they offer more direct exposure to the price of copper, carry the potential for the volatility that accompanies the performance of many commodities as well as the risk of contango and roll costs. And while CPER comes with the burden of a K-1 form at tax time, JJC, as an ETN, has counterparty risk attached to it.  

 

Contact Heather Bell at [email protected] 

Heather Bell is a former managing editor of etf.com. She has also held editorial positions at Dow Jones Indexes and Lehman Brothers. Bell is a graduate of Dartmouth college and resides in the Denver area with her two dogs.