Funds Providing Exposure to Industrial Metals Are Proving to Be Resilient Against High Inflation
Their advantage is that they offer investors relatively easier exposure to the metals markets compared to the need to have to go through future contracts where a commodity is bought at an agreed price before being actually paid for.
Two of the funds are the iPath Series B Bloomberg Industrial Metals Subindex Total Return ETN (JJM) or the Invesco DB Base Metals Fund (DBB). These two investment vehicles are oriented towards broad industrial metals and both provide investors with exposure to a basket of metals composed of copper, zinc, and aluminum.
JJM and DBB have delivered YTD performances of 4.99% and 4.39% respectively in sharp contrast to the underperformance of the SPDR S&P 500 ETF which provides an idea of investor’s sentiment towards the broader market.
Source: Trading View
Now, in addition to this short-term outperformance, there are other reasons which make industrial metals attractive.
The rationale to invest in industrial metals
Industrial metals like copper, zinc, aluminum are at the heart of the global construction and manufacturing industries. This is the reason why they form part of the cyclical industry, or one dependent on the economic cycle, which can be either at a recovery or recessionary stage. I believe that demand should be upheld due to three main factors.
First, prices are mostly tied to the economic woes of China, the world’s largest consumer with its massive factories which use these metals as raw materials for churning millions of cars, washing machines to electronics. Now, the post Covid recovery in industrial activity in China had already enabled copper, nickel, and, to a lesser extent, aluminum to rebound. In 2021, the upturn in demand was more global and the prices of these metals continued to rise. After a slowdown at the end of last year, due to some issues in the Chinese real estate sector, prices fell but still remain relatively high.
Now, China’s central bank has announced monetary easing (in contrast to the U.S. where there are more talks about tightening) to support the real estate sector, there are reasons to be cautiously optimistic about the prospects of commodities in general in that country, sufficient to create enough marginal demand to cause the price of industrial metals to move higher.
Second, industrial metals are most likely to benefit from decarbonization and infrastructure programs. Here, the production of renewable energy systems, like solar and wind power can imply consumption of five times more copper than conventional energy systems. Metals like Lithium are also used for the production of electric vehicles (EV). With many countries and regions in the world now stepping up their climate ambitions, the demand outlook for industrial metals has received a boost. In this respect, a study by SPGlobal entitled “Green energy revolution – Boost for industrial metals demand” forecasts that just electric vehicle market growth will boost copper demand to 1.84 million tons by 2025.
Third, there is the $1.2 trillion infrastructure plan converted into law by the U.S. President back in November last year which involves funding for road and rail transportation, telecommunications, and power grid projects. These would in turn require hundreds of thousands of tons of metals in addition to concrete. There are also tens of miles of lead pipes that have to be replaced to upgrade the water distribution system.
Therefore, demand should be sustained for many years and this is the reason many analysts are convinced that industrial metals are going to play a role as an inflation hedge. Now, together with precious metals, industrial metals form part of the commodities group, which have performed relatively well during periods of low and rising inflation.
Pursuing further, in addition to opting for funds providing exposure to a basket of industrial metals, one can also choose to invest in metal-specific funds.
Choosing individual metal funds
I provide three such investment vehicles, for aluminum, zinc, and copper respectively.
First, there is the iPath Series B Bloomberg Aluminum Subindex Total Return ETN (JJU) which holds aluminum. This ETN (Exchange Traded Note) offers exposure to futures contracts and not direct exposure to the physical commodities.
Second, there is the Wisdom Tree Zinc (ZINC), an ETC (Exchange Traded Commodity) designed to gain exposure to total return investment in zinc through tracking of the Bloomberg Zinc Subindex. ZINC is quoted in London.
Third, the United States Copper Index Fund (“CPER”) is an ETS (Exchange-Traded Security). It tracks the SummerHaven Copper Index Total Return. CPER is designed to be a convenient, cost-effective way for investors to access the returns of a portfolio of copper futures contracts.
These three investment vehicles have produced different YTD returns with JJU (aluminum) outperforming at 10%, somewhat compensating for its 2020 underperformance. Nonetheless, the other two have produced positive returns for 2022 too.
Source: Trading View
In addition to the metal-specific option, there is also the possibility to invest in individual names.
Choosing individual stocks
Here, investors can also opt for the large diversified miners, such as Rio Tinto (NYSE:RIO), Vale (NYSE:VALE), or BHP Billiton (NYSE:BHP). There are also metals producers such as Alcoa (NYSE:AA) for aluminum. However, before investing, it is important to do research on each of these individual stocks, pertaining to rewards and risks.
Finally, industrial metals should benefit from three tail winds in 2022 and beyond, but, the transition to a carbon-neutral world is likely to be gradual and, therefore, patience is key. Investors should also be able to withstand temporary headwinds pertaining to the commodities sector in general in the aftermath of inflation-related news.
Disclosure: This is an investment thesis and is intended for informational purposes. Investors are kindly requested to do additional research before investing.