Copper Funds & ETFs: Profits Abound, Where Picks Matter (FCX, JJC, CU, COPX, XLB, IYM, VAW)

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In the past 12 months, copper has risen from about $2.80/pound to as high over $4.60/pound, an increase of about 64%. The red metal now trades at about $4.10, or about 46% above its year-ago price. That’s about twice the rise in gold over the same time period.

Last week we looked at some analysts’ estimates of copper prices for the rest of this year.  Today we’ll look at six exchange-traded products that offer investors exposure to copper. Of these, all but one maintain a significant position in Freeport-McMoran Copper & Gold Inc. (NYSE: FCX), the world’s largest publicly traded copper miner. What does that mean, if anything? The six ETPs we’ll look at are iPath DJ-UBS Copper Total Return Sub-Index ETN (NYSE: JJC), First Trust ISE Global Copper Index (NYSE: CU), Global X Copper Miners ETF (NYSE: COPX), Materials Select Sector SPDR (NYSE: XLB), iShares Dow Jones US Basic Materials (NYSE: IYM), and Vanguard Materials ETF (NYSE: VAW).

Freeport-McMoran is the largest publicly traded copper miner and the second largest in the world, behind Chile’s state-owned Codelco. Freeport’s share price peaked in January at about 85% above its 12-month low, but the shares have lost about half that gain since. As is the case with most commodity producers, the market price of the commodity dictates how successful the company will be. The company’s projected dividend yield is 2.09%, and its market cap is approximately $45.5 billion. The company’s forward P/E ratio is just 7.6, indicating that there’s still growth available here.

The iPath DJ-UBS Copper Total Return Sub-Index ETN (NYSE: JJC) buys high-grade Comex copper futures. In the past year, JJC topped out at a gain of about 62% and closed Friday up about 41% from its 12 month low. Compared with gains on copper itself, this fund matched up best because it is a pure-play in copper. As of last Friday, assets in the fund totaled about $208 million, and the fund’s expense ratio is 0.75%.

The First Trust ISE Global Copper Index (NYSE: CU) invests in common stocks or ADRs of public companies that mine copper. Its stake in Freeport-McMoran amounts to 5.62% of total assets of $227 million. For the past year, the fund has matched the 45% increase in the value of Freeport-McMoran, but not because of its investment in the miner. The fund’s second largest holding, Toronto-listed Equinox Minerals Ltd., has been acquired by Barrick Gold Corp., and Equinox’s shares have jumped more than 32%. We’ve already noted that copper miners may be acquistion targets for gold miners looking to boost profits.  A fund like CU, with holdings in 29 miners, could benefit from additional mergers and acquisitions. CU yields 0.82% and its expense ratio is 0.70%.

The Global X Copper Miners ETF (NYSE: COPX), like CU, invests only in copper miners though its assets total only about $85 million. Its 36 holdings could also get a boost from more acquistions. COPX missed on Equinox, though, which was not one of its portfolio companies. The fund’s yield is 0.45% and its expense ratio is 0.65%.

The Materials Select Sector SPDR (NYSE: XLB) invests in a wide variety of basic materials, including copper miners. It’s portfolio includes 31 holdings, with Freeport-McMoran as its second largest at about 11% of total assets. XLB’s diversity in its holdings, which include chemical and fertilizer companies, is what drives gains for the $2.5 billion fund. XLB yields slightly more than 3% and its expense ratio is a very low 0.20%. The fund gets a 3-star rating from Morningstar.

The iShares Dow Jones US Basic Materials (NYSE: IYM) follows the same basic investment strategy as XLB, and four of its top five holdings are identical: Dupont, Freeport-McMoran, Dow Chemical, and Newmont Mining. IYM currently holds 69 stocks and its total assets amount to about $922 million. Unlike XLB, however, the fund’s yield is just 1.15% and its expense ratio is 0.47%. IYM holds a 3-star rating from Morningstar.

The Vanguard Materials ETF (NYSE: VAW) is a non-diversified materials fund that tries to replicate (before expenses) the performance of the MSCI US Investable Market Materials 25/50 Index. Freeport-McMoran is its single largest holding at 8.27% of total assets amounting to about $880 million. Similar to XLB and IYM, the fund holds Dupont, Freeport, Dow Chemical, and Newmont in its top six holdings, and Monsanto in common with the top holdings of XLB. The fund holds 100 stocks and yields 2.07% with a very low expense ratio of 0.24%. VAW carries a 4-star rating from Morningstar.

XLB, IYM, and VAW are all rated as large-cap blended funds, but all three shaded more toward the value side than to the growth side. The top holdings in each are nearly identical and with the possible exceptions of Freeport-McMoran and Newmont, the holdings are not growth plays, but income generators. The upside potential is in smaller positions in smaller stocks.

None of these funds could be considered a fundamental holding in a portfolio. But depending on one’s appetite for risk, any of these offers an opportunity to invest in copper.

Paul Ausick