Posted on 19 August 2011.
Copper 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 copper 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).
Copper ETFs that are available to traders and investors traditionally only offer investment in copper indirectly via the copper commodity contracts and options that are held by the Copper ETFs. iShares, which is managed by BlackRock and is the largest ETF company, filed with the United States Securities and Exchange Commission (SEC) in the fall of 2010 to offer a physical iShares Copper ETF that will be called the iShares Copper Trust. This means that instead of investing indirectly in the copper markets via commodity futures and options, the iShares Copper ETF would actually own physical copper, which would be purchased on the commodities markets and held in warehouses. The amount of copper that is physically held by the iShares Copper ETF would be dependent upon the amount of money invested in the fund.
According to the iShares Copper Trust SEC filing, the price of the shares will be based on the price of copper that trades on the London Metals Exchange. The copper that the iShares Copper ETF physically holds will be stored in warehouses in the United States or in other locations, if approved by the trustees of the trust.
Copper is a popular industrial metal to invest in because it is used in so many industrial, commercial, and consumer applications, particularly in electrical, plumbing, and building applications. As the world economy grows and billions of people demand better standards of living, demand for products made out of copper electrical, plumbing, and building materials grows, which causes the price of copper to rise on commodities exchanges around the world.
The iShares Copper ETF will allow investors to participate directly in the copper markets and to profit from growing world demand for copper by investing in physical copper. The major benefit of buying physical copper via the iShares Copper ETF, verses investing in copper via a Copper ETF that derives its value from copper commodity futures and options, is that the potential for price decay is removed when an investment is made in an ETF that invests in physical copper. This means that the money invested will have more potential to grow over time, since it will not be encumbered by price decay.
Price decay occurs when copper futures contracts in further out months are more expensive than the current futures contract. Since the manager of a commodities contract based 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. The iShares Copper ETF will derive its value from the physical copper that it will store in warehouses, thus avoiding the issue of price decay.
As of August 2011, the iShares Copper ETF is not yet available for trading and investing. However, once the iShares Copper ETF is launched, those interested in trading or investing in copper would be wise to take a look at this direct physical copper ETF to make the most of their trades or investment in copper.
To learn more about copper ETFs, see Investing in Copper Via a Copper ETF.
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