While the weakness in the price of gold seems to attract the most media attention, it isn’t alone among the metals in its poor recent performance. Using the returns of exchange-traded products as a proxy, the performance of base metals has been as bad as, or worse than, the precious metals since March 1.
|Metal||ETF/ETN||Ticker||Return, March 1 – May 18|
|Gold||SPDR Gold Trust||GLD||-7.24%|
|Silver||iShares Silver Trust||SLV||-19.31%|
|Platinum||ETFS Physical Platinum Shares||PPLT||-14.59%|
|Palladium||ETFS Physical Palladium Shares||PALL||-15.47%|
|Copper||iPath Dow Jones UBS Copper Subindex Total Return ETN||JJC||-13.49%|
|Aluminum||iPath DJ-UBS Aluminum Subindex Total Return ETN||JJU||-14.96%|
|Nickel||iPath DJ-UBS Nickel Subindex Total Return ETn||JJN||-16.95%|
This price action has attracted bargain hunters, albeit without reward thus far. But for those inclined to play the sell-off in metals prices, what’s the best way to position for a recovery? The answer may be two lesser-known exchange-traded products that provide broad exposure to the mining sector and industrial metals, respectively.
The first is the SPDR S&P Metals and Mining ETF (NYSEARCA:XME), which has $698 million in net assets and an average trading volume of 4.1 million shares over the past three months. The ETF, which has liquid options with reasonable spreads, tracks the S&P Metals & Mining Select Industry Index — which means if a company pulls something solid out of the ground, chances are it has a spot in this ETF.
According to the SPDR website, the fund’s assets are broken down as follows: steel, 32.30%; diversified metals and mining, 26.95%; coal and consumable fuels, 15.48%; gold, 8.83%; precious metals and minerals, 8.66%; and aluminum 7.77%.
The most important benefit of this approach is that it enables investors to make a play on the downtrodden mining sector without having to take on industry- or company-specific risk. This is key right now for the simple reason that correlations across this group are extraordinarily high, so there’s little benefit to picking an individual stock. But at the same time, the potential for adverse company-specific news flow is elevated.
Take Patriot Coal (NYSE:PCX) as an example. It reported that a key customer was in jeopardy of defaulting on its payments, driving its shares down 32% last week. XME enables an investor to eliminate this possibility and narrow risk exposure to the macroeconomic issues that have been weighing on the mining sector as a whole.
While XME is oversold on a technical basis, be aware that it’s right at its support level of $40. Caution is, therefore, the name of the game here. Still, one investor stepped up on Monday and bought 5,000 Sept. 54 calls at 40 cents, a $200,000 bet that XME will rise about 34% between now and Sept. 21.
The second ETF to consider is the PowerShares DB Base Metals Fund (NYSEARCA:DBB), which uses futures exposure to achieve its current weightings of 37.65% in copper, 34.38% in zinc and 34.28% in aluminum. As of Monday’s close, the ETF was down 12.6% from its January year-to-date high.
DBB is relatively small, with net assets of $362.9 million and average three-month daily trading volume at just over 13,000 shares. Still, it’s likely to benefit from any recovery in investor sentiment regarding the outlook for global economic growth. Monitor the lower support line, currently sitting at $18.27, as a reference point.
Again, caution is essential. As long as concerns about Europe are pushing up the U.S. dollar, base metals and mining stocks will continue to face a headwind. Still, those thinking about bottom-fishing in the metals and mining group should take a close look at both of these ETFs.
As of this writing Daniel Putnam didn’t own any securities mentioned here.