Metal ETFs were clearly out of investors favor for much of 2014 and have been unloved so far this year. The combination of a stronger greenback, a slumping China, the oil price rout and the adverse demand-supply imbalance have put a hold over several industrial metals in recent times.
Since the Chinese economy accounts for about half of the global consumption of the industrial commodities, a steep slowdown in the country’s economy and a protracted downturn in its manufacturing sector mean reduced demand for commodities (read: What is in Store for Industrial Metal ETFs After China Rout?)
While the commodity market is yet to show any definite sign of recovery, a trend reversal seems to be playing on the horizon. A diminishing supply glut, multi-year low metal prices and production cuts in the face of loss-making might open up opportunities for some metal ETFs.
Also, investors are increasingly wagering on hopes of a solid monetary stimulus in China which in turn will shore up the manufacturing sector and fuel metal prices and the related ETFs.
Given this, investors may want to consider cycling into the industrial metal space in order to obtain a momentum play and profit out of a beaten-down space.
How to Pick Right ETFs?
First, fundamentals need to be favorable, then investors can look at our Zacks ETF Rank. This system looks to find the best ETFs in a given market segment based on a number fundamental and technical factors about the ETF and the Zacks forecast for the underlying industry or asset class.
Following this technique we at Zacks revised our ETF ranks recently and found out that two metal ETFs have been upgraded from #3 (Hold) #2 (Buy). Below we highlight these two metal ETFs (see: Our Zacks ETF Rank Guide):
Aluminum
Aluminum consumption is likely to surge helped by the automotive and packaging industries. The boom in the airline industry is also another catalyst in driving the price higher. Also, policy easing in China should play a major role as the economy accounts for over 40% of global aluminum consumption.
iPath Pure Beta Aluminum ETN (FOIL)
The product focuses on the Barclays Capital Aluminum Pure Beta TR Index. The index consists of a single futures contract but has a unique roll structure which selects contracts using the Pure Beta Series 2 Methodology. This strategy looks to limit the impact of contango while at the same time provides the collateralized return from U.S. T-Bills.
The product has amassed about $1.6 million in assets and trades in paltry volumes of 500 shares a day. The product charges 75 bps in fees. FOIL was up over 4.5% in the last one month (as of September 25, 2015) (see all Industrial Metals ETFs here).
Dow Jones-UBS Aluminum Total Return Sub-Index ETN (JJU)
This ETN delivers returns through an unleveraged investment in the futures contracts on aluminum and currently consists of one futures contract on the commodity. The product trades in a paltry volume of about 1,000 shares daily on average and has amassed $2.2 million in AUM. Expense ratio comes in at 0.75%. The product gained over 0.1% in the last one month.
Nickel
A fear of supply shortage could push up nickel price in Q4. Brazil’s giant producer expects the price to rebound in the last quarter brining about the ‘strongest performance’ since the start of 2015.
GMK Norilsk Nickel PJSC, the world’s second largest producer of nickel and Russia’s biggest mining company, ticked up its metal deficit forecast on a further cut in production. A significant reduction in LME inventory can be considered as a cue for a stable nickel market going forward.
Plus, Indonesia’s decision to carry on the ban on exporting unprocessed ores would support the nickel price recovery. Notably, Indonesia is the world’s biggest producer and exporter of nickel, and accounts for 18–20% of global supply.
iPath Pure Beta Nickel ETN (NINI)
This note seeks to match the performance of the Barclays Capital Nickel Pure Beta Total Return Index. Unlike many commodity indexes, this product can roll into one of a number of futures contracts with varying expiration dates, as selected, using the Barclays Pure Beta Series 2 Methodology.
The ETN manages just $0.8 million in its asset base and sees light volume of about 1,500 shares a day, suggesting additional cost beyond the annual fee of 75 bps per year. The note was down 2.4% in the last one month (as of September 25, 2015).
iPath Dow Jones-UBS Nickel Subindex Total Return (JJN)
This ETN tracks the Dow Jones-UBS Nickel Subindex Total Return. The index delivers returns through an unleveraged investment in the futures contracts on nickel and currently consists of one futures contract on the commodity.
The product is a bit expensive as it charges 75 bps in fees per year. It trades in a paltry volume of nearly 5,000 shares daily on average that increases the trading cost in the form of a wide bid/ask spread. The fund is also unpopular and has attracted just $6.3 million in AUM. JJN lost 0.8% in the last one month.
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