Will metal ETFs continue to fuel commodities in 2018?

 

After lagging in the first half of 2017, commodities staged a nice comeback in the second half amid continued bullishness in the stock market and an increased appetite for riskier assets. In fact, commodities ended 2017 on a high note, registering the longest rally since 1991, with the Bloomberg Commodity Index, which measures returns on 22 raw materials, capping the 11-day winning streak.

While agricultural commodities were the major losers, industrial and precious metals like palladium, aluminum, zinc, gold, and copper gained on a pick-up in global growth, tight supply conditions, and rising global demand. Energy commodities also gave a strong performance in the back end of the year on easing global supply glut.

A weak dollar added to the strength. The ICE dollar index, which measures the dollar against a basket of six other currencies, recorded an annual decline for the first time in five years, falling in double digits.

Given this, we have highlighted the best-performing ETFs that delivered double-digit returns in 2017 and are expected to continue their strong trend in 2018 as well:

ETFS Physical Palladium Shares PALL – Up 60.2%

Pallidum was the biggest winner of 2017 owing to the increased usage of gasoline-fueled and hybrid vehicles, which have propelled demand for the precious metal higher. Notably, more than three-fourths of palladium demand came from the auto market. Additionally, persistent supply shortfall over the past five years coupled with strong global demand particularly in Asia is adding to the strength. The trend is likely to continue this year.

PALL seeks to match the price of palladium. With AUM of $235.2 million, the ETF owns palladium bullion in plate or ingots kept in Zurich or London under the custody of JPMorgan Chase Bank. It has an expense ratio of 0.60% and sees lower volume of about 27,000 shares a day. The product has a Zacks ETF Rank #3 (Hold) with a High risk outlook.

iPath Bloomberg Aluminum Subindex Total Return ETN JJU – Up 31.4%

Aluminum, which is used in a wide range of industries including aerospace, construction and packaging, benefited from output curbs in the world’s largest producer of the metal, China. This has led to excess demand resulting in improving utilization rates and higher aluminum prices.

JJU follows the Bloomberg Aluminum Subindex Total Return, which delivers returns through an unleveraged investment in the futures contracts on aluminum. The ETN has been able to manage $3.2 million in AUM and trades in paltry volume of 1,000 shares per day. Expense ratio comes in at 0.75%. JJU has a Zacks ETF Rank #3 with a High risk outlook.

iPath Bloomberg Copper Subindex Total Return ETN JJC – Up 30.2%

Copper is enjoying its best run in almost three decades on supply concerns out of China, stronger demand from a growing global economy and a weaker U.S. dollar. In particular, abating fears of a hard landing and renewed optimism about the health of the Chinese economy are providing a huge boost to the price. This is because China accounts for 40% of global demand for the red metal.

The ETN tracks the Bloomberg Copper Subindex Total Return Index, which seeks to deliver returns through an unleveraged investment in the futures contracts on copper. The index currently consists of one futures contract on the commodity of copper (currently the Copper High Grade futures contracts traded on the COMEX). The product charges investors 75 bps a year in fees, and has AUM of $70.5 million. It trades in a paltry volume of about 52,000 shares a day on average. However, the ETN has an unfavorable Zacks ETF Rank #4 (Sell) with a High risk outlook.

IPATH-BB COPR (JJC): ETF Research Reports

ETFS-PALLADIUM (PALL): ETF Research Reports

IPATH-BB ALMN (JJU): ETF Research Reports

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Symbols: JJC JJU PALL
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