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3 Metal ETFs to Buy on the Commodity Upswing

DBB UBM JJM

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Commodities have shown extreme weakness this year while many other sectors have held up quite well. However, recent trends in the space have been encouraging, as most commodities have rebounded from their lows or are even moving higher.

This is especially true with the industrial metals that have attracted investor interest in the past couple of weeks, leading to huge inflows. China, the major driver of industrial metals, is showing signs of stabilizing with strong trade data leading many to feel more bullish on the space.

Improving demand from China, Euro zone escaping recession, tight supply conditions, and a weak dollar of late are adding to the bullish fundamentals for the metals (read: Copper ETFs Surge on Solid China Trade Data). 

Further, the increased chances of the Fed curtailing stimulus have led to uncertainty in the market. Investors are thinking that the equity markets have reached the highest level and could slump, or stay range bound, from here. As such, they are moving to commodities, which look cheaper at current levels.

Given the bullish trend at present, investors may want to consider cycling into the industrial metal space in order to obtain a nice momentum play as we move ahead in the final part of the year.

While looking at individual metals is certainly an option, focus on top ranked broad industrial metal ETFs could be a less risky way of tapping the same broad trends (see more ETFs in the Zacks ETF Center).

Top Ranked Industrial Metal ETFs in Focus

We have found a number of ETFs or ETNs that have the Zacks ETF Rank of 2 or ‘Buy’ rating in the industrial metal space and are thus expected to outperform in the months to come (read: all the Top Ranked ETFs).

While all these top ranked products are likely to outperform, the following three funds could be good choices to tap into the space. This trio has enjoyed strong momentum over the past few weeks, and has potentially superior weighting methodologies or focuses which could allow them to continue leading the industrial metal space in the months ahead too.

PowerShares DB Base Metals Fund (DBB)

This product tracks the DBIQ Optimum Yield Industrial Metals Index Excess Return, which is a rules-based index consisting of futures contracts on some of the most heavily traded base metals commodities in the world.

The fund holds three commodities – aluminum, copper, and zinc – in equal weights. The ETF has amassed $273.9 million in its asset base and trades in average daily volume of more than 230,000 shares. This would probably ensure slight or no additional cost beyond the expense ratio of 0.78%.

Though DBB lost about 10% in the year-to-date time frame, it added over 6% so far this month, suggesting a modest turnaround may be at hand in this product (read: 2 Commodity ETFs Offering Investors Sweet Returns).

ETRACS CMCI Industrial Metals Total Return ETN (UBM)

This ETN provides exposure to the portfolio of commodity futures through a single investment by tracking the UBS Bloomberg CMCI Industrial Metals Index Total Return. The benchmark seeks to deliver returns from a basket of six futures contracts representing the industrial metals sector. The commodity futures contracts are diversified across five constant maturities ranging from three months to three years out.

In terms of holdings, big chunks of the assets are tied to copper and high grade copper, as these two account for 46% of the assets. Aluminum (30%), zinc (10%), nickel (10%) and lead (5%) round out the rest of the portfolio, meaning exposure is reasonably well spread out.

The product is less popular and illiquid with AUM of less than $5 million and average daily volume of less than 9,000 shares. The ETN charges 65 bps in fees per year from investors and gained over 7% so far in the month. Still, the note is down 8.5% year-to-date so the product has a ways to go to get back to breakeven for 2013.

iPath Dow Jones UBS Industrial Metals Sub Index Total Return ETN (JJM)

This ETN follows the Dow Jones-UBS Industrial Metals Subindex Total Return, which delivers returns through an unleveraged investment in the futures contracts on four industrial metal commodities. The future contracts for aluminum, nickel and zinc are traded in the LME while copper future contract is traded on the COMEX.

The note has a slight tilt towards copper that makes up 42% of assets. Aluminum, nickel and zinc account for 35%, 13%, and 10% share, respectively. The ETN has been able to manage assets worth $22.9 million while volume is light. It also has a steep expense ratio of 75 bps.

Though the note lost over 12.6% year-to-date, it added about 7% this month suggesting it has been a strong momentum play in the commodity world (read: 5 Silver ETFs Surging on Commodity Strength).

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