Why ETFs All Want This Hot Investment

In many previously unexplored sectors of the financial markets, exchange-traded funds have been responsible for creating a stir throughout the investment community. But for one particular investment, so many companies tried to offer a related ETF that they ended up tripping over each other.

ETFs that will turn your fingers green
If you had to come up with what investment would draw this much attention, it'd be natural to guess precious metals like gold, which have run up so quickly in recent months. Alternatively, you might go with an emerging-markets stock fund, given the wide exposure that booming economies like China and Brazil have gotten lately.

But as it turns out, the hottest investment in the ETF world right now is a lot less glamorous. And the bigwigs among ETF providers are scrambling to try to get first-mover status.

Yesterday, Barron's reported that JPMorgan Chase (NYSE: JPM  ) filed with the SEC to establish an ETF that directly holds physical copper. The move is the latest in a series of fund companies seeking to create a presence in the copper ETF market. London's ETF Securities has filed for a similar fund, and until recently, both BlackRock (NYSE: BLK  ) and Goldman Sachs (NYSE: GS  ) intended to come out with a physically backed copper ETF as well.

Why copper is the new gold
Unlike so many commodity crazes in the past, copper's popularity doesn't come solely from higher prices. Copper prices are at two-year highs, but with gains of around 15% for the year, copper can't stand up to the gains of most of the precious metals complex as well as base metals like nickel and tin.

But just as gold bulls cite the many roles that gold plays, copper also serves multiple purposes:

  • As an industrial metal used in everything from electrical wire and plumbing to electronics, copper demand is seen as a general indicator of economic activity.
  • As part of the commodities market, copper is part of several major commodities index. For instance, the Goldman Sachs index gives copper a higher weight than both gold and silver combined, as well as the highest weight among industrial metals.
  • Mining for gold often produces copper as an additional byproduct and vice versa. As a result, mining companies such as Yamana Gold (NYSE: AUY  ) and Freeport-McMoRan (NYSE: FCX  ) often end up with both gold and copper production from their mines. So investors who are interested in gold often find that their investments are also affected by conditions in the copper market.

Perhaps most importantly, with hopes of economic recovery ever-present, copper could keep rising even if greater confidence takes away from the fear-based component of gold investment demand, leading to a correction in gold prices.

Are disruptions coming?
Interestingly, some critics believe that a flurry of physical ETFs could end up ruining copper's reputation as an economic indicator. Analysts at the Wall Street Journal have observed that as commodities gain a following among institutional investors as a financial tool, they lose some of their value as a fundamental indicator of industrial supply and demand.

The story pointed to oil's wild gyrations over the past three years as an example of what happens when ETFs come to dominate a commodity market. And certainly, gold investors can't discount the impact that SPDR Gold Trust (NYSE: GLD  ) and iShares Comex Gold (NYSE: IAU  ) have had in collectively taking tens of billions of dollars in gold supply off the market.

Whether copper will generate the same flurry of activity remains to be seen. Obviously, at under $4 per pound, the logistical challenges of storing the physical metal are in some ways greater than the precious metals ETFs face.

Watch out for ETF madness
What's clearest from this episode, though, is that ETF providers are facing cutthroat competition to get into potentially hot new areas of investment demand. As the field of untapped new investments gets ever more scarce, you can expect that competition to get even more fierce in the months and years to come.

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Fool contributor Dan Caplinger's fingers turn green whenever he wears his copper ring. He doesn't own shares of the companies mentioned in this article. BlackRock is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy is solid gold with a copper plating.


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