Why These Commodity ETFs Are On A Tear

It seems that commodities are back with a bang, especially the industrial metals. Metals are riding high on favorable demand-supply dynamics and a subdued greenback. Powershares DB US Dollar Index Bullish Fund UUP is off about 8.6% so far this year and has lost about 2% in one year (as of Oct 20, 2017). Since most commodities are priced in the greenback, a dip in the U.S. dollar bodes well for metal investing (see all Industrial Metals ETFs here).

Plus, an uptick in global growth has added to the metal strength. Be it developed economies or the developing ones, all are exhibiting harmonized growth, as deemed by Jeffrey Sherman, DoubleLine Capital’s deputy CIO. He believes that we haven’t witnessed “this coordinated growth since ’04, ’05, and ’06.”

Industrial metals, which have long been in stagnation, are now getting the love of hedge funds too. Reduction in output has finally adjusted excess supplies, leading to higher prices for industrial metals. PowerShares DB Base Metals ETF DBB is up 21.4% so far this year (read: Should You Follow Hedge Funds and Play Metal ETFs?).

After all, readings in several big economies’ manufacturing activities have come in favorable in recent times giving cues of strength in global superpowers, which should catapult in Q4. This area had long been an issue since global growth worries translated into softer demand. However, the weakness is dispersing now. Most of the PMI readings came in higher than 50, pointing to an expansion in activity (read: 5 Solid Reasons to Buy Industrial ETFs Now).

DoubleLine Capital’s deputy CIO also likes the commodity because of its diversification benefits from the stock or bond market.

ETFs to Profit

Below we highlight a few winning metals and their related ETF investments that could shower gains on investors in the coming days.

ETFS Physical Palladium (NYSE:PALL) PALL – Up 42.8%

The precious metal ETF Palladium is the best performing industrial metal this year. Rising deficit and demand from the automotive industry is driving the rally. Palladium-using petrol-fueled cars are “the primary type sold in the two largest markets of China and the US,” as per the source. So, increased usage of petrol-driven vehicles is contributing to the recent rise in palladium price.

This fund seeks to match the spot price of palladium, net of fees and expenses. The ETF owns palladium bullion in plate or ingots kept in Zurich or London under the custody of JPMorgan Chase (NYSE:JPM) Bank. The fund has an expense ratio of 0.60% (see: all the Precious Metal ETFs here).

iPath Bloomberg Copper SubTR ETN JJC – Up 25.9%

Copper prices are on a tear right now on renewed optimism about the health of the Chinese economy. China's economic growth eased to 6.8% in the third quarter from 6.9% in the second quarter (read: China ETFs in Focus as GDP Growth Slows).

However, it is on its way to surpass the government's annual forecasts, as per analysts. Plus, China’s central bank governor expects the economy to expand 7% in the second half of this year, gaining momentum from the first half. China matters the most for copper as the country is the world’s biggest consumer of this industrial metal.

The copper ETN tracks the Bloomberg Copper Subindex Total Return, which seeks to deliver returns through an unleveraged investment in the futures contracts on copper. The product charges investors 75 bps a year in fees (read: Why Copper ETFs Are on a Tear).

iPath Bloomberg Aluminum SubTR ETN JJU– Up 24.1%

Aluminum prices are on a tear this year thanks to China’s efforts of lowering illegal or polluting capacity. “Forced closures of unapproved plants to curb overcapacity and heavy cuts in production over the winter months to ease choking pollution,” led to a surge in Aluminum prices, as per the source. The product follows the Bloomberg Aluminum Subindex Total Return, which delivers returns through an unleveraged investment in the futures contracts on aluminum. Expense ratio comes in at 0.75% (read: 3 Red Hot Base Metal ETFs).

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.

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