How to Invest in the Industrial Metals ETFs

May 12, 2022 02:54 PM ET
How to Invest in the Industrial Metals ETFs

Industrial metals are those that are widely used in the manufacturing of products. They are used in diverse sectors like automobile, aviation, healthcare, and utility sectors. In this article, we will provide examples of popular industrial metals and how to invest in their exchange-traded funds (ETFs).

Examples and uses of industrial metals

There are a large group of industrial metals that are used in various sectors. Some of the most popular industrial metals are listed below.

  • Copper - It is a metal used for its high conduction rate. It is also highly malleable and corrosion-resistant. As such, it is used widely in the electrical industry.

  • Aluminum - It is a metal used in most industries. For example, aluminum is used in packaging, automobile, and aviation.

  • Nickel - It is used to make coins and in the battery manufacturing industry. 

  • Steel - Steel is one of the most important metals in the world. It has uses in industries like automobiles, marine, tools, and infrastructure.

  • Zinc - Zinc is an important industrial metal that is widely used to galvanize other metals like steel.

There are other metals that are at the intersection of industrial and precious metals. For example, silver is often classified as a precious metal, although it has a large industrial use. It is used widely in the manufacture of products like solar panels and computer chips. Similarly, Platinum Group Metals (PGMs) like platinum and palladium are both precious and industrial metals.

How to invest in industrial metals

There are several methods of investing in precious metals. The most common approach is to buy financial products tied to these metals. One of the most popular products is known as a contract for difference (CFD), which is an instrument that tracks the metal directly. When you buy a CFD, you are simply tracking the price of the financial asset without owning it directly. 

Second, you can invest in industrial metals futures. A futures product is a financial product where a buyer agrees to buy a commodity at a certain expiry period at a certain price. Futures are usually offered by large companies like CME and CBOE. 

Further, one can invest in stocks of mining companies. The idea is that these companies will always do well as long as commodities are rising and vice versa. Therefore, by investing in a stock, investors will benefit as the stock price rises and as the firm returns funds to investors in the form of dividends. Examples of the biggest mining companies are BHP, Anglo American, Glencore, and Rio Tinto.

The final approach is that of investing in commodity ETF. These are financial assets that track a single commodity or a group of mining stocks. In the next part, we will identify some of the most common industrial metal ETFs.

The United States Copper Index Fund (CPER)

Copper is one of the most important industrial metals in the world. It is widely used in the manufacturing of products that conduct electricity. As such, it is used by utility companies, automakers, and other industry entities. This explains why many market watchers view copper as the barometer of the global economy.

The United States Copper Index Fund is an ETF that tracks a basket of copper futures, meaning that it has exposure to the industry. At the time of writing, the fund has over $1 billion in assets. It has an expense ratio of 0.80%, making it a bit expensive. The chart below shows that its performance reflects that of copper itself. 

Copper vs. CPER

However, as shown, copper performs better than CPER, and it does not have an expense ratio. As such, it makes sense to buy copper futures directly.

Invesco DB Base Metals Fund (DBB)

The Invesco DB Base Metals Fund is an ETF that tracks the most important industrial metals globally: aluminum, copper, and zinc. As a passive fund, the company tracks the DBIQ Optimum Yield Industrial Metals Index Excess Return fund. According to its website, the fund has a market value of over $532 million. It has an expense ratio of 0.77%.

DBB vs S&P 500

The process of investing in this ETF is straightforward. All you need to do is to create an account with a popular exchange like Robinhood and Schwab, select it, and the amount of money you want to spend. The chart above shows that the DBB Fund has underperformed the S&P 500.

Abrdn Bloomberg Industrial Metals Strategy (BCIM)

The Abrdn Bloomberg Industrial Metals Strategy is an ETF that tracks the Bloomberg Industrial Metals Subindex. Its basket of holdings is some of the most important metals in the industry. Its composition is copper, aluminum, zinc, and nickel futures. 

BCIM vs S&P 500

Therefore, this fund makes it possible to invest in metals that are difficult to invest in, like aluminum and nickel. The BCIM fund has a net expense ratio of 0.39%, making it an affordable fund to invest in.

SPDR S&P Metals and Mining ETF (XME)

Another way of investing in industrial metals is to buy mining stocks. This is a fund that follows companies that mine industrial metals. The XME ETF is one of the biggest in the industry, with more than $3 billion in assets. It is also a relatively affordable fund that has an expense ratio of 0.35%.

A closer look at the fund shows that companies in the fund focus on most metals. For example, it has steel companies like Reliance Steel & Aluminum, Nucor, Cleveland-Cliffs, and Steel Dynamics. It also companies in the aluminum industry like Century Aluminum, Kaiser Aluminum, and Hecla. SPDR Metals and Mining ETF

Other companies in the fund are also in the gold and silver mining industries. The chart above shows the stellar performance of the XME Fund.

Summary

The industrial metal market has been in strong growth recently as the crisis in Ukraine rages on. As the commodity supercycle continues, there is a likelihood that the sector will continue doing well. In this article, we have identified some of the most important ETFs to invest in.


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