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Why Nickel ETFs Might Be a Great 2014 Investment

JJN NINI

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After a lackluster 2013, commodities across the board are gaining traction this year thanks to supply/demand imbalances and recovering macro fundamentals. Though precious metals are performing remarkably well, nickel is leading the gains in industrial metal market this year. In fact, nickel moved up nearly 3% so far this year.    
 
Most of the gains in nickel price came this week after Indonesia imposed a ban on unprocessed mineral ore shipments, effective January 12. Indonesia is the world's biggest producer and exporter of nickel, and accounts for 18–20% of global supply.
 
Additionally, about half of the nickel supply in China comes from this Southeast Asian country in the form of nickel pig iron. The move by Indonesian government would limit the production of nickel pig iron, which is used in the making of stainless steel, and thus increase the price of nickel in China (read: China ETFs Tumble to Start 2014).
 
The global nickel market is currently facing a supply glut with 147,600 metric tons produced in the first 10 months of 2013 but is expected to lag global demand in 2015. According to research firm Macquarie Group, the surplus would fall drastically to 35,000 metric tons in 2014 from the expected 150,000 tons in 2013.
 
The supply shortage will lead to a further surge in nickel prices as we move further ahead into this year and the next. Investors planning to tap the upcoming nickel shortfall and the rising price could find any of the following two ETFs an intriguing choice.
 
Both members of the duo have a Zacks ETF Rank of 2 or ‘Buy’ rating, suggesting that the products may outperform in the coming months. Let us discuss these in detail below (see: all the Industrial Metal ETFs here):    
 
iPath Dow Jones-UBS Nickel Subindex Total Return (JJN - ETF report)
 
This ETN tracks the Dow Jones-UBS Nickel Subindex Total Return. The index delivers returns through an unleveraged investment in the futures contracts on nickel and currently consists of one futures contract on the commodity.
 
The product is a bit expensive as it charges 75 bps in fees per year. It trades in paltry volume of nearly 6,000 shares on average daily basis that increases the trading cost in the form of a wide bid/ask spread. The fund is also unpopular and attracted just $4.9 million in AUM. The ETF is up over 1.6% year-to-date (read: 3 Commodity ETFs Surging Higher).
 
iPath Pure Beta Nickel ETN (NINI - ETF report)
 
This note seeks to match the performance of the Barclays Capital Nickel Pure Beta Total Return Index. Unlike many commodity indexes, this product can roll into one of a number of futures contracts with varying expiration dates, as selected, using the Barclays Pure Beta Series 2 Methodology.
 
This approach might result in less contango, which could prove crucial, as shifting from month to month in contracts can eat away at returns during an unfavorable market situation.
 
Further, the ETN manages just $3.2 million in its asset base and sees light volume of less than 9,000 shares a day, suggesting a wide bid/ask spread. As such, investors have to pay extra beyond the annual fee of 75 bps per year. The fund added 2.47% in the year-to-date time frame.
 
Bottom Line
 
Nickel prices have shown an impressive comeback of late and this trend will likely continue in the coming months (read: Best ETF Strategies for 2014). This is especially true as the ban on ore exports by Indonesia would reverse the excessive oversupply situation and the demand from alloy industries is on the rise.
 
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