Physical ETFs – Aluminum, Copper, Zinc – Here For Good?

by on

The physically backed metal ETF engine continues to move forward, as ETF Securities launched another round of industrial metal ETFs in early May. ETF Securities, a leading provider of exchange-traded products (ETPs) backed with physical metal such as gold and copper, listed their ETF products in aluminum, zinc and lead on the London Stock Exchange on May 3, according to Reuters.

Since its release, there is currently one confirmed warrant (24.766 tons) of physically backed aluminum on ETF Securities’ rolls, according to their daily tracking (compared to 131 warrants of confirmed physical copper, or 3276.551 tons, as of May 16. ETFS released the copper ETP in December 2010.)

Although the general uptake of the products has been slow, the broad concern that physical metal ETFs would squeeze inventories of the metal in times of supply chain tightness still exists, which led Andy Home of Reuters to recently analyze whether this is indeed the case.

Home indicates that there are a variety of ways to invest in copper, of which the physical ETPs constitute only a small percentage:

Source: Andy Home/Reuters

Yet copper’s tightness continues to make its popularity as an ETFS investment vehicle grow, compared to tin and nickel (released alongside copper):

Source: Andy Home/Reuters

Most of his presentation supports the fact that commodities investment is here to stay; the front end covers the history of ETFs, which clearly shows that commodity investment has gotten stronger in the past couple decades, and the numbers of current and projected holdings (JP Morgan, BlackRock) support that as well.

Some takeaways Home provides from all this:

  • Because interest is high and metals are becoming scarcer, investment products will continue evolving
  • Somewhat paradoxically, demand for “hard assets may go down after QE and zero interest rates turn around, reshaping the investment landscape
  • The cost structure (fees, warehousing, etc.) may curtail retail investor interest

He leaves off with an interesting question by juxtaposing the Rotterdam physical premiums for copper and aluminum (below): which is the tighter market copper of aluminum?

Food for thought indeed. Any takers?

–Taras Berezowsky

Leave a Comment

Your email address will not be published. Required fields are marked *