Although copper wiring is found extensively in electric generating equipment, when it comes to investing, you can think of the metal as the anti-utility.
While utilities are considered defensive because homes and businesses need electricity no matter what the economy is doing, copper is the opposite. The conductive metal is considered cyclical, meaning it is tied to boom-and-bust cycles.
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Demand for copper — which is widely used in electronics, electricity generation and distribution, automobiles, and buildings — is often considered an economic indicator. So much so that the metal is often called Doctor Copper, as if it had an advanced degree in economics.
Here are the major market factors that could shift copper prices and four exchange-traded funds to consider:
— Chinese economy.
— Energy transition and AI.
— Mining constraints.
— Tariff uncertainty.
— Copper ETFs.
Chinese Economy
The economic ebbs and flows in China are particularly important for the copper market, as the Asian manufacturing powerhouse is the world’s largest consumer of the metal.
“Chinese demand will make or break the market this year,” says John Berman, chief investment officer with Berman Capital Group. “If the Chinese economy starts picking up, copper supply and demand balances will tighten.”
One of the fastest-growing industries in China has been electric vehicles. And even though EV sales growth globally has been slowing, people are still adopting the vehicles at a decent clip, just not as quickly as they once were.
“Copper demand is very strong in China, led by autos,” says Robert Minter, director of ETF investment strategy at abrdn. “China’s electric vehicles are in a class by themselves, evidenced by strong domestic demand and extreme policies abroad designed to close off international markets to Chinese EVs.”
Energy Transition and AI
A related case for copper demand is the transition in the power and grid distribution industry from fossil fuels to renewables. Like with electric vehicles, there is more copper used in renewable electricity installations such as solar and wind farms than there is in traditional power plants.
And even as the world will need more for wind and solar farms and an improved grid, there is an emerging source of demand that will increase the need for electricity altogether — artificial intelligence.
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For many years, electricity demand in the U.S. has been relatively flat, but the data centers that run powerful computers that back AI internet searches and proprietary AI for businesses need a lot of power to run.
“Globally, even small shifts in energy sources are straining the grid’s ability to provide stable energy supply,” Minter says. “There will be meaningful grid capacity additions over the next decade to meet growth needs of electrification and AI.”
Mining Constraints
Copper will be integral to that expansion because it is an excellent conductor of electrons, relatively cheap and abundant — that is, if mining companies can get it out of the ground fast enough.
“The demand for copper is growing meaningfully faster than the ability of miners to grow supply,” Minter says.
Copper prices are well above their pandemic-induced lows and are elevated by historical standards, although they aren’t at record highs right at this moment.
Part of the reason for the elevated prices is that supply is having trouble keeping up with demand.
“There are continued constraints on supply additions from rising labor and energy costs, regulations and the disconnect between strong copper demand and mediocre capital availability for miners,” Minter says.
Tariff Uncertainty
Beyond mine supply, the President Donald Trump’s tariff policy is a wild card for the copper market.
“Trump’s tariffs are likely a tool used to gain leverage to equalize terms of trade, or protect borders, and less as a means to economically punish another allied country,” Minter says. “It is entirely unpredictable if those efforts escalate to affect copper trade on a global scale, and the duration of those tariffs if enacted are highly unknowable.”
Berman agrees that the extent to which tariffs might affect the copper market isn’t totally clear.
“Tariffs by the Trump administration definitely have the potential to affect copper markets,” Berman says. “It is still hazy what exactly is going to happen with those, though, and the effect could range from minor to significant.”
Best Copper ETFs to Buy
If you want to invest in copper to gain exposure to the global economy, one way to do that is through the futures market.
But while futures prices are important to watch, these derivative contracts generally aren’t a great place to start for the average investor.
Futures require constant maintenance, as traders have to roll over contracts when they expire or sell them. There is also leverage involved, which can magnify gains but also losses.
A much easier way for everyday investors who want to buy and hold shares to gain exposure to copper is through exchange-traded funds.
These investment vehicles are traded on an exchange under a ticker symbol like stocks, but they contain holdings of many companies, giving investors instant diversification. There are other types of exchange-traded vehicles, such as notes or funds that focus on futures, but for this list we’re sticking to equity-backed funds.
Even though copper mining companies do generally track the price of the metal, there are also corporate considerations that make diversification important. For example, bad management decisions such as an ill-timed acquisition can pressure shares of a company even if copper prices are rising.
These are four of the best ETFs that hold copper mining companies:
Global X Copper Miners ETF (ticker: COPX)
With $2.5 billion in assets under management, this is one of the biggest copper mining equity ETFs traded on U.S. markets.
That size can be important, as it generally correlates to higher liquidity, which means investors may find it easier to buy or sell shares quickly on any given trading day.
The fund holds 39 mining companies and tracks the Solactive Global Copper Miners Total Return Index.
While the fund holds large copper mining companies, no stock takes up more than 6% of the fund’s holdings, meaning it won’t suffer as much if a single company runs into trouble as the shares of that company do.
The fund has an expense ratio of 0.65%, or $65 annually on $10,000 invested.
iShares Copper and Metals Mining ETF (ICOP)
While the size of a fund is important, it’s not the only consideration for investors.
This offering from BlackRock, for example, is much smaller, with $47.1 million in assets under management, but it is backed by a major Wall Street firm and has an expense ratio of just 0.47%.
Like COPX, this fund tracks an index, and that passivity helps keep fees low compared with funds that pay managers to adjust holdings based on a variety of factors instead of simply rebalancing them at regular intervals to match changes in an index.
Compared with COPX, this fund gives more weight to certain miners, including B shares of Grupo Mexico (OTC: GMEXICOB.MX) at 8.2% of its portfolio, BHP Group Ltd. (BHP) at 7.9% and Freeport-McMoRan Inc. (FCX) at 7.5%.
But these are all well-established mining companies, and there are many other miners in the fund, meaning the risk is well spread out.
Sprott Copper Miners ETF (COPP)
This fund claims to be the only pure-play ETF focused on large-, mid- and small-cap copper miners.
Also index-based, the fund tracks the Nasdaq Sprott Copper Miners Index, which includes copper producers, developers and explorers.
That type of diversification can be important in mining investment as different types of miners have different risk profiles.
Producers are the least risky, as they are generally established and are getting metal out of the ground that they can sell, providing cash flow. Also, they often have more than one mine in production, meaning they are better able to weather production stoppages from labor unrest, accidents, natural disasters and political turbulence in the far-flung places where miners often operate.
Meanwhile, companies that are developing mines or simply exploring for deposits are more risky but can offer more reward.
The fund has an expense ratio of 0.65%.
Sprott Junior Copper Miners ETF (COPJ)
This fund focuses on that latter end of the spectrum, tracking an index of mid-, small- and micro-cap companies in copper mining-related businesses.
While many mining companies don’t survive long for a variety of reasons, such as lack of funding, small exploration-stage companies can provide substantial returns if they find an excellent deposit.
If that happens, they often sell themselves to larger mining companies, providing investors with quick returns, or develop the deposit themselves, which is a lengthy and risky process but can create substantial long-term value.
That also brings up one of the risks of ETFs. Because they hold so many companies, they are unlikely to perform as well as a single miner that strikes it big.
COPJ has an expense ratio of 0.78%.
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4 Best Copper ETFs to Buy originally appeared on usnews.com
