The top metal ETFs revealed
Investing sites often haphazardly provide a list of ETFs of metals. Barely any background research is done. This is unfortunate, as even ETFs in the same category differ from each other. Here are things you should consider:
1.) Average daily trading volume and market cap. The larger the better. Liquidity is critical for shares. In some of the smaller funds you will see larger fluctuations and bigger bid/ask spreads.
2.) Stocks or futures? ETFs that invest in stocks will be more stable and also provide dividends in addition to capital gain returns. The price of futures are significantly tied to the price of the metal and thus have far greater volatility.
3.) Composition. If the ETF is stock-based, how are the holdings determined? Those that hold international stocks will hold currency-rate risks. Most of the leading metal firms are foreign and thus ETFs that are strictly domestic will probably contain small cap stocks. How the weighing of companies is also very important. ETFs typically are based on market-cap (larger companies have a greater allocation) while some are weighted equally (meaning small-cap companies will play a relatively much larger role).
To get an update on the average volume and market cap, simply look up the ETF in Goggle Finance.
GlobalMarket Vectors Steel Index (SLX) – [Average Daily Volume: 339k | Market Cap: $134m]. This ETF is based on the modified market capitilization-weighted AMEX Steel Index. It is composed of international companies involved in the mining and processing of ore and the production of steel. The top 5 holdings are foreign and include names like Rio Tinto and Mittal Steel.
SPDR S&P Metals and Mining (XME) – [Average Daily Volume:3.3 million |Market Cap: $700m]. This ETF is made up of 23 stocks from S&P Total Market Index. It is entirely composed of US firms, which is notable as the largest iron-ore and steel companies are foreign. It also contains a number of small cap stocks, which play an outsized role as the ETF is equally weighted as opposed to being market-cap based.
Vanguard Materials ETF (VAW) – [Average Daily Volume:137k|Market Cap:$287m]. This ETF is composed of domestic large-cap stocks. . This is oddly listed by many ETF sites as a play on metals. But the fund’s focus is far more broad. In addition to metal companies, the ETF contains chemical, glass and paper product firms. In fact, the two largest holdings are Mosanto and Du Pont.
iShares Dow Jones US Base Materials (IYM) [Average Daily Volume:1.5 million|Market Cap:$736m]
This large fund offers liquidity. The fund is purely made of domestic stocks. Those looking for a purely metal funds should look elsewhere as the fund is based around the broader category of industrial metals. One of the top holdings is Dow Chemical.
ETF Powershares Base Metals (DBB) – future contracts, include aluminum, zinc, copper – performance of industrial metals, based on Deutche Bank Liquid Commodity Index, rules-based index
ETF Powershares Base Metals (DBB) [Average Daily Volume:186k|Market Cap:$369m ]unique, invests in future contracts every month. Rules-based. Including Aluminum, zinc and grade A copper. Spot prices.
E-TRACS CMCI Industrial Metals ETN (UBM) [Average Daily Volume, 2k| Market cap: $3m]. This ETF is designed to track the UBS Bloomberg CMCI Industrial Metals Total Return index, which is composed of 5 industrial metal future contracts. This ETF has an alarmingly low average volume and should probably be avoided except for advanced investors.
iPath Dow Jones AIG Lead Total Return Sub-index ETN (LD) Average Volume: 5k Market Cap $7.5m
iPath Down Jones AIG Copper Total Return Sub-index ETN (JJC) Average Volume: 122k Market Cap: $102m
iPath Dow Jones AIG Nickel Total Return ETF (JJN) Average Volume: 33k Market Cap: $16m
These funds are composted of unleveraged future contracts. The funds are quite small but they are run by Barclays, a reputable bank.