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Investing in Copper Via a Copper ETF

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Using A Copper ETF For Copper Commodity Investment

Copper ETFCopper is a commodity that can be bought and sold via various copper commodity contracts at commodities exchanges.  A commodity is a fungible item; meaning it can be replaced or exchanged by another identical product of similar quality that is produced anywhere.

Since trading copper commodity contracts involves buying commodity futures and options that can be highly volatile and risky, many traders and investors are not inclined to buy and sell copper via copper commodity contracts.  An easy alternative that allows traders and investors to participate in the copper market is buying and selling an interest in copper via a Copper Exchange Traded Fund (ETF).

While buying a Copper ETF is not the same as buying physical copper and does not have the potential for windfall profits that copper commodity contracts have, a Copper ETF does allow a trader or investor profit from changes in the price of copper futures without assuming the risk of buying copper commodity contracts.  The performance of a Copper ETF is directly correlated to the performance of the underlying copper commodity contracts and options that the Copper ETF holds.  If the copper commodity futures contracts rise in price, then the associated copper commodity contracts and options that the Copper ETF holds also increase in value, which causes the value of the Copper ETF to increase in price.  The Copper ETF loses value if the copper commodity futures contracts fall in price.

Investing or trading the copper market by buying or selling short a Copper ETF is inherently less risky than buying or shorting copper commodity contracts, since a Copper ETF spreads the risk out by buying multiple copper commodity contracts and reinvests the proceeds before the contracts expire, ensuring that the Copper ETF does not lose all of its value, as the futures and options contracts expire.  Buying, selling, or selling short a Copper ETF is literally as easy as buying or selling as a stock.  You use the symbol for the Copper ETF to enter buy, sell, and short sale orders, just as you would any stock.

When the copper commodity contracts and options expire, the Copper ETF buys more of the copper commodity contracts and options for future months, in accordance with their bylaws.

Understanding Price Decay When Investing In A Copper ETF

While investing in the copper market via a Copper ETF is a good way to limit investment risk, investors and traders need to understand price decay that can reduce the value of the Copper ETF over time if copper futures are not rising in price.  Price decay occurs when copper futures contracts in further out months are more expensive than the current futures contract.  Since the manager of a Copper ETF has to sell the current copper commodity contracts before they expire and “roll them over” into copper contracts for future months, the price of the Copper ETF can decay in price if the current copper commodity contracts that they sell are worth less than further out months that they must buy to maintain their position in copper.  Even a modest difference in the price of the current and further out copper commodity contracts can cause a significant decay in the price of a Copper ETF over a long period of time, as the Copper ETF holds less copper commodity contracts due to the higher prices that must be paid for copper commodity contracts in the further out months.

Those who wish to make copper commodity investment part of their investment strategy are encouraged to learn as much as possible about what a Copper ETF is, which can be a very useful investment tool to make money on commodity price changes and can serve as a hedge against price declines in other investments.

To learn more about futures, see Buying and Selling Futures.  To learn more about options on commodity futures, see Option Trading Basics.

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