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Copper ETFs Surge on Solid China Trade Data

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Worries have been building over the Chinese market, thanks to concerns regarding a number of aspects of the nation’s economy such as the financial sector and the still heavy dependence on manufacturing to power growth. This has culminated in sluggish GDP growth rates and speculation that annual GDP increases could fall below 7%.

These trends have led to poor trading not only for China ETFs, but for copper ETFs as well. After all, China is the largest consumer of copper in the world, so its economic outlook will have a huge impact on prices for the red metal (read China ETFs Tumbling on Fears of Credit Crunch).   

As a result, copper prices have fallen by nearly 20% on the year, pushing the metal down alongside many of its other beaten down peers in the commodity world. And with China still struggling, there has been little optimism that the industrial metal could turn it around heading into the end of 2013.

A Glimmer of Hope?  

However, some investors could be turning more bullish on the metal thanks to recent figures out of the nation. China just released data regarding its exports and imports for July, and both figures were actually quite strong.

Exports rose 5.1% in July when compared to the year ago time frame, led by strong export growth to the U.S. (5.3%), and Europe (2.8%), the two biggest destinations for the country’s goods. Meanwhile, imports were even more surprising, moving higher by 10.9% when compared to the year ago forecast, pushing the trade surplus to just $17.8 billion (also Base Metal ETFs Soar on Strong Data).

This is especially encouraging because it suggests that there has been some progress in rebalancing the country’s economy, meaning that a slightly more self-sufficient China could be around the corner. Additionally, imports of commodities were also high, suggesting strength is ahead for China, and that the world’s top consumer of copper is hungry for more of the metal.

Market Impact

The news unsurprisingly led to bullish trading conditions in Chinese ETFs, pushing major funds up by over 1% on the day. The real strength was seen in the copper ETF market though, as products in this space added a couple percent and led the way higher. Below, we highlight two such ETFs which were especially impacted by this trend, and could be funds to watch if China continues to rebound:

iPath DJ-UBS Copper TR Sub-Index ETN

This exchange-traded note looks to follow the Dow Jones-UBS Copper Subindex Total Return, giving investors exposure to the return of futures contracts on copper. The benchmark is also a total return index, so investors also receive a collateralized investment in T-bills as well (see the full list of Top Ranked ETFs).

The product charges investors 75 basis points a year, and it has decent volume and assets under management. This is especially true when you compare the note to other products in the space, none of which have attracted much in interest.

The ETN added about 2.9% after the China data came out, though the product was down about 6.3% in the trailing three month period.

First Trust ISE Global Copper Index Fund

For an equity play on copper, investors have CU as an option. This ETF tracks the ISE Global Copper Index, tracking companies engaged in some aspect of the copper mining industry, including mining, refining, or exploration (read the Guide to Broad Metals and Mining ETFs).

The fund doesn’t utilize a market cap weighting system for its holdings, instead seeking to give more weight to firms that are more exposure to copper production, as represented by copper-related revenues. Due to this, small and mid caps do make up a decent chunk of assets, while foreign stocks—specifically Canada and the UK—make up the majority of the portfolio.

The product charges investors a somewhat high 70 basis points a year in fees, while it hasn’t seen the most in terms of popularity. In fact, the volume here is rather low, suggesting that bid ask spreads may be wide in some cases.

CU added about 4.1% following the bullish China news, hopefully signaling an end to the bear run for this ETF. The product has been beaten down though, as it has lost nearly 20% in the past three months, and more than a third of its value since the beginning of the year, so it may be an interesting play at these prices if trends continue.

Bottom Line

There has been extremely rough trading in the China ETF market to start 2013 as concerns over debt and growth rates hit shares in the nation. These worries have also impacted commodities, and particularly copper, as China is a huge consumer of the red metal.

Recent data from the country though has been rather encouraging, suggesting that the worst may possibly be over. This could help copper prices in the near term, and if China continues to rebound, it may make copper ETFs interesting—but high volatility—value plays for intrepid investors.

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