Copper is the metal of the moment. What ETF investors need to know before chasing the commodity rally.

By Isabel Wang

Hello! This is MarketWatch reporter Isabel Wang bringing you this week's ETF Wrap. In this edition, we look at some of the copper-related ETFs that hit all-time highs earlier this week, driven by the base metal's surge to record territory.

Please send tips or feedback to isabel.wang@marketwatch.com or to christine.idzelis@marketwatch.com. You can also follow me on X at @Isabelxwang and Christine at @CIdzelis.

Sign up here for our weekly ETF Wrap.

Commodity exchange-traded funds took center stage in May as gold, silver and copper prices reached historic levels, while uranium and aluminum ETFs surged to multiyear peaks.

This momentum was especially pronounced in copper-related ETFs, which mirrored a month-long rally in copper prices fueled by expectations of rising demand and deepening supply shortages.

Copper prices (HG00) on Tuesday climbed to their highest levels on record - with the most active, July contract (HGN24) settling at $5.106 per pound on Comex - before giving back some of their gains on Wednesday. The price of the red metal finished at $4.792 a pound on Thursday afternoon, still up 5% so far this month, according to Dow Jones Market Data.

The United States Copper Index Fund CPER, the largest ETF that tracks the price of the metal through futures contracts, on Tuesday rose to its all-time high, while the Global X Copper Miners ETF COPX, which tracks shares of copper producers, on Monday advanced to its highest level since August 2011, according to FactSet data.

See: What record highs for gold, silver and copper are saying about the economy

Copper in uptrend as supply-demand imbalance remains

Copper prices have been soaring since the beginning of this year, buoyed by diminishing U.S. recession concerns amid a resilient labor market and rosy corporate earnings. Additionally, signs of an economic resurgence in China, which accounts for 50% of global copper consumption, have further bolstered the demand for the industrial metal.

"Now with the idea that the Fed is eventually going to start the [monetary] easing at some point this year, there's less fear about a recession. As the economy improves, it's going to be good for the 'Dr. Copper,'" said Kathy Kriskey, senior commodities ETF strategist at Invesco.

But copper's demand could see an even bigger boost thanks to its ties with renewable energy. The consumption of industrial metals used for "green" purposes - that is, electric vehicles, renewable capacity, expansion of the electricity grid and battery storage - will grow by about 7% each year between now and 2050, according to Kieran Tompkins, climate and commodities economist at Capital Economics. He said that would be roughly twice the pace that overall consumption of these metals has grown by since 2010.

See: 'Green' tech and EVs will lead to 'huge' shift in metals demand, analyst says

Copper has also emerged as the "new gold" for artificial intelligence. Rising demand for AI, which is reliant on power from larger data centers that commonly use copper for wiring, could also drive copper prices higher, strategists told MarketWatch.

However, it's not solely about heightened demand.

Physical metals inventory at the London Metal Exchange shows that copper supply is at or near its lowest level in the last 25 years, Robert Minter, director of ETF investment strategy at Abrdn, told MarketWatch in a phone interview on Wednesday.

"There's just not enough copper mines that can ramp up as fast as we need them to, and it can take around a decade between finding copper and getting it out of the ground," Invesco's Kriskey noted. "Something has to give when the supply and demand cannot meet. What is giving? The price."

Inflationary concern

The gains in copper prices have sparked discussions on Wall Street, with some suggesting that the massive need for copper could be inflationary and may deter the Fed from lowering interest rates by the end of this year.

Akin to surging oil prices feeding into higher inflation, higher copper prices could lead to increased production costs in the construction and manufacturing sectors, potentially driving up consumer prices for goods and services.

"We have to factor in that this energy transition and this massive demand for copper will be inflationary, but I don't think that is going to go crazy," Kriskey said. "I do think that the Fed will very disciplined and not be lowering rates anytime soon, just because they risk the higher inflation that they've worked so hard to combat."

However, Minter said copper prices can go up without having "a dramatic effect on inflation" as the red metal is not as deeply intertwined with the economy as oil and gasoline, commodities which can have broad-reaching impacts across multiple sectors.

"There's an element of oil price for all the goods that come to your house, which is not the same for copper," he added.

See: Missed the gold and silver rally? Metal mining stocks may be a way to catch up.

Broad-based commodity ETFs

Investors who want to be part of the copper rally may consider broad-based commodity ETFs to avoid concentration risk, said strategists.

The Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF PDBC, which has over $5 billion under management and is the largest fund that tracks a basket of commodity futures, has advanced by 6.3% so far in 2024. Over 20% of its holdings are energy-related futures contracts, while around 5% of its holdings are base metals, according to Invesco's website.

The First Trust Global Tactical Commodity Strategy Fund FTGC is up 8.5% this year, while the iShares S&P GSCI Commodity-Indexed Trust GSG has gained more than 10% over the same period, according to FactSet data.

"Don't chase a commodity rally. They will come to you, so just be disciplined," Kriskey said. "Tactically, I think commodities deserve that 5% allocation for what they bring to a portfolio: diversification."

As usual, here's your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

The good...

   Top performers                                                                                                                                                                             %Performance 
   United States Natural Gas Fund L.P.                                                                                                                                                        13.1 
   YieldMax COIN Option Income Strategy ETF                                                                                                                                                   11.8 
   Invesco Solar ETF                                                                                                                                                                          7.9 
   Fidelity Wise Origin Bitcoin Fund                                                                                                                                                          7.1 
   Valkyrie Bitcoin Fund                                                                                                                                                                      6.9 
   Source: Source: FactSet data through Wednesday, May 22. Start date May 16. Excludes ETNs and leveraged products. Includes NYSE-, Nasdaq- and Cboe-traded ETFs of $500 million or greater. 

... and the bad

   Bottom performers                      %Performance 
   AdvisorShares Pure U.S. Cannabis ETF   -9.4 
   KraneShares CSI China Internet ETF     -4.4 
   iShares U.S. Home Construction ETF     -3.8 
   iShares China Large-Cap ETF            -3.3 
   iShares U.S. Transportation ETF        -2.8 
   Source: FactSet data 

New ETFs

State Street Global Advisors on Tuesday announced the launch of the SPDR Portfolio Treasury ETF SPTB, which provides low-cost exposure to U.S. Treasury securities with remaining maturities greater than or equal to one year. Priced at 3 basis points, SPTB seeks to track the performance of the Bloomberg U.S. Treasury Index, the firm said in a press release.Amplify ETFs on Tuesday launched the Amplify Weight Loss Drug & Treatment ETF THNR, an index-based ETF offering access to companies at the forefront of developing and marketing GLP-1 treatments. The fund operates with a net expense ratio of 0.59%. YieldMax on Tuesday announced the launch of the YieldMax Gold Miners Option Income Strategy ETF GDXY which seeks to generate income via a covered-call strategy on the VanEck Gold Miners ETF GDX. The fund does not invest directly in GDX.

Weekly ETF Reads

This Nvidia-heavy investing strategy has been outperforming the S&P 500 (MarketWatch)Grayscale CEO Michael Sonnenshein steps down as firm's bitcoin ETF bleeds assets (MarketWatch)Technology stocks are once again leading the way in 2024. Why these ETFs tell a different story. (MarketWatch)Uranium ETF soars to 10-year high on rising demand and Russia import ban (MarketWatch)First-ever spot bitcoin fund set for launch on London Stock Exchange (MarketWatch)Hong Kong Retail Traders Build Big ETF Wagers on Rally Reversal (Bloomberg)

-Isabel Wang

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

05-23-24 1754ET

Copyright (c) 2024 Dow Jones & Company, Inc.