Back to top

Image: Bigstock

Should You Follow Hedge Funds and Play Metal ETFs?

Read MoreHide Full Article

Metals are riding high on favorable demand-supply dynamics and a subdued greenback. Powershares DB US Dollar Index Bullish Fund UUP is off about 9.7% so far this year and has lost about 1% in the last one month (as of Sep 19, 2017). Since most commodities are priced in the greenback, a dip in the U.S. dollar bodes well for metal investing (read: 3 Reasons to Buy Gold ETFs Now).

Probably, this is why Hedge funds are targeting the metals’ industry at their maximum speed since 2011. Industrial metals, which have long been in stagnation, are now getting the love of hedge funds. Reduction in output has finally adjusted excess supplies, leading to higher prices for industrial metals.

What Makes Metals So Popular

As per a source, “that oversupply crisis led to the closure of some specialist metals hedge funds, including those run by Apollo Global Management and Hall Commodities.” But things like pollution control are now fueling the space.

The above-mentioned source went on to explain that an environmental clampdown in China, the world’s biggest user and maker of industrial metals, reduced supplies to keep pollution at check.

Barclays data revealed that “investment in industrial metals, including from indices and exchange-traded funds, totaled $27 billion in July, up from $23 billion a year ago and $14 billion in 2015.”

Among some of soaring metals, copper, aluminum and nickel deserve special mention. Copper price jumped to a 32-month high on bullish hedge fund bets in August. Early last month, research house Jefferies indicated that prices may remain erratic in the near term and rise to $2.75/lb in 2018 and $3/lb in 2019 from the current $2.87/lb. Research house Jefferies even sees the possibility of $4/lb or above pricing in copper in the next five years. This benefited funds like United States Copper Index Fund CPER (read: 3 Red Hot Base Metal ETFs).

Aluminum prices are now close to a six-year high despite China’s restrictions. iPath Pure Beta Aluminum ETN is thus a great bet now. JPMorgan sees aluminum prices rising another $100 a ton in the fourth quarter, noting they “have been well supported by collective realization that supply reform is a reality, despite Chinese aluminum inventories more than quadrupling so far this year,” as quoted on Financial Times.

The key steel-making ingredient iron ore is now hovering around its five-month high level, while zinc prices are at the highest level in 10 years, as per Financial Times.

ETFs to Profit

While metal ETFs are ways to play this euphoria, investors can try equity forms as well. Below we highlight a few such products.

SPDR S&P Metals & Mining ETF XME

The fund has about half the exposure to the steel industry, followed by Coal & Consumable Fuels (13.94%) and Aluminum (11.64%). The fund charges 35 bps in fees.

iShares MSCI Global Select Metals & Mining Producers ETF PICK

This underlying index of the fund looks to track the performance of companies in both developed and emerging markets that are mainly engaged in the extraction and production of diversified metals, aluminum, steel and precious metals and minerals, excluding gold and silver. The fund focuses on BHP BILLITON Ltd (8.73%), Rio Tinto Plc (7.62%) and Glencore Plc (7.45%). It charges 39 bps in fees (read: 2 Mining ETFs and Stocks to Buy Now).

Bottom Line

While demand-supply dynamics may favor these products, investors should note that hawkish Fed policies can deter the rising momentum of metal and mining ETFs.

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>