Cotton – a Basic Commodity With Many Uses

Cotton is harvested from plants grown in warm, subtropical regions around the globe. It is considered to be a “soft” commodity along with similar agricultural products like sugar, coffee or cocoa. Its main use is within the clothing industry, however, several industrial uses requiring cotton as a raw material also contribute to the overall demand for this commodity.

The three largest producers of cotton worldwide are China, India and the United States, in this order. A curious fact which has a strong influence on the global cotton market is that China, as the largest producer, is an even larger consumer of cotton, turning the country into a net importer. Consequently, India and the United States of the world’s largest cotton exporters.

The Cotton Investing Case

Like most other commodities, cotton has seen a strong price increase in 2009 and 2010. In fact, prices are now at historic heights, unseen in recent decades. While the price increase of most other commodities has slowed down in 2011, cotton has continued its upward trend, leading to an overall price increase of more than 200% compared to 2008. The reason for this price increase is a strong and growing Chinese demand, coupled with ongoing supply constraints due to unfavorable weather conditions in the largest producer nations. Additionally, the amount of land used for growing cotton has constantly decreased for almost three decades now, further limiting the amount of cotton available in global markets. Combined with the fact that cotton is a product with one of the longest “lead times” of all commodities -it takes more than one and a half years from the seed to the finished cotton product- this makes quick increases the global supply unlikely.

The future development of cotton prices therefore depends almost solely on the direction the Chinese demand will take. Naturally, a price rally such as the one experienced by cotton leads to a high volatility and big price swings, making cotton ETFs some of the most volatile funds on the market. Consequently, many investors believe that an at least temporary drop in prices is to be expected in the near future, making short cotton ETFs a much sought-after alternative.

The Cotton ETF List

Several investment options exist for targeting the cotton market. All of them are based on future contracts for trying to replicate the time development of the cotton market price. Three “ETF-like” securities exist which exclusively hold cotton futures in their portfolio, of which two are traded on US stock exchanges. Another ETF with a significant cotton exposure completes the list.

• The Dow Jones-UBS Cotton Total Return Sub-Index ETN (symbol: BAL) tracks a single cotton future and is the largest exclusively cotton-focused fund on the market with a market capitalization of about $50 million. As an exchange-traded note (ETN) it is not a true ETF, but a debt obligation by the fund issuer.
• The Pure Beta Cotton ETN (symbol: CTNN) is another ETN which exclusively tracks an index based on cotton futures. At a much lower market capitalization of about $5 million, it has received less attention than the more well-known BAL.
• The ETFS Cotton (symbol: COTN) issued by ETF securities also tracks cotton futures. It is set up as an exchange-traded commodity (ETC) which like ETNs is in reality a debt obligation by the issuer. The ETFS Cotton fund is traded on the London Stock Exchange in the UK.
• ETF securities also offers a short cotton ETF to profit from falling prices. Called the ETFS Short Cotton (symbol: SCTO) it is set up in a similar way to the COTN fund as an exchange-traded commodity and is also traded on the London Stock Exchange.
• Finally, the Dow Jones-UBS Softs Total Return Sub-Index ETN (symbol: JJS) is a soft commodity fund with an exposure to cotton futures of about 1/3 of its portfolio, with sugar and coffee making up the rest.

Among all commodity exchange-traded funds (ETFs), agriculture ETFs have a special place because of the importance that their underlying commodities have in the day-to-day life of every person. This importance and the developments on the markets for agricultural commodities in recent years are a main reason why wheat ETFs have gathered such a strong and growing interest among investors.

Of all the factors influencing the price of wheat, there are three outstanding supply and demand effects that will most likely determine future developments. First, the demand for wheat as a basic food ingredient has been rising for years and will most probably continue to do so, both due to the increase in the world’s population and as well due to the advancing industrialization of the emerging economies and the accompanying rise in living standards. Second, the growing use of bio-fuels also impacts the wheat market. Although wheat itself is currently not used for fuel production, almost all other grains actually are. The associated rise in demand for soybeans and corn indirectly increases the demand for wheat as foodstuff. In contrast to the ever increasing demand, supply of wheat has been heavily constrained due to limitations in arable land as well as recurring supply shortages due to natural catastrophes like Russia’s recent drought.

Investing in Wheat Through ETFs

Investing in wheat is not directly possible with financial instruments listed on U.S. exchanges. The two available options would then be either ETFs tracking agricultural commodity futures with a large exposure to wheat or alternatively ETFs targeting the stocks of companies or countries with a large wheat-related component. Due to the relatively low exposure attainable in the second case, the following wheat ETF list will focus on the first option.

The Wheat ETF List

The following list of wheat-related ETFs contains five funds with a partial exposure to wheat futures listed on U.S. stock exchanges and an additional pure wheat fund listed on the London Stock Exchange.

• The PowerShares DB Agriculture Fund (DBA) invests in four agricultural commodity futures, with a 25% exposure to wheat
• The iPath DJ-UBS Grains Total Return Sub-Index ETN (JJG) tracks only three different agricultural commodity futures with an overall 30% exposure to wheat. It is not a true ETF, but an exchange-traded note (ETN)
• The iPath DJ-UBS Agriculture Total Return Sub-Index ETN (JJA) invests in seven agricultural commodity futures, with a 20% exposure to wheat. It is also an exchange-traded note (ETN)
• The ELEMENTS MLCX Grains Index Total Return ETN (GRU) is also an exchange-traded note (ETN) with a high wheat exposure of almost 50%
• The ELEMENTS Rogers International Commodity Agriculture ETN (RJA) is a more conservative ETN with a diversified portfolio of 20 agricultural commodities, offering a 20% exposure to wheat
• On the London Stock Exchange, the Wheat Exchange Traded Commodity (ETC) is a special financial instrument traded in a way similar to ETFs under the symbol WEAT, which is actually a debt note issued by the fund managing firm. It tracks the DJ-UBS Wheat Sub-Index and offers a true 100% exposure to wheat. Additionally, leveraged and short ETCs are available under the wheat ETF symbols LWEA and SWEA, respectively.

Uranium – a Rare Commodity

Uranium is a radioactive metal which is mined mainly for its use as a fuel in nuclear power plants worldwide. While there are other special uses for this material -both civilian and military-, power generation is the only use which drives the production capacities and thus the price of uranium.
The largest producer is Kazakhstan at a little over one quarter of worldwide supply, followed by Canada, Australia and Namibia. Uranium is not traded on an exchange like most other commodities, but is rather sold and bought in private deals between producers and users. Consequently, no future-based or even physical uranium ETFs exist, and both relevant ETFs mentioned below are stock-based.

Investing In Uranium

Predicting the future price of a commodity with any accuracy is always difficult at best. With uranium, the turbulent history of nuclear power generation adds another level of uncertainty. However, it seems unlikely that nuclear power will disappear anytime soon. For example, Japan remains strongly dependent on nuclear energy even after the 2011 disaster, while Russia, China and India are aggressively expanding their nuclear power generation capacities. With many reactors currently under construction, it is unlikely that demand will decrease significantly in the near-term.

The supply of uranium has remained flat over recent years, as not many exploration projects have been carried out until recently. With less than 15 uranium suppliers worldwide, large near-term increases in production capacity are unlikely.

On the other hand, power plants need uranium for operation, and since fuel costs make up a very small part of their overall energy production costs, the price of uranium is not their major concern, as long as the supply can be guaranteed.

Specific Uranium ETFs

Two ETFs with exposure to uranium and the nuclear industry are currently listed on U.S. exchanges and make up the whole uranium ETF list:

• The Global X Uranium ETF issued by Global X (Symbol: URA) tracks an index composed of 24 companies worldwide which are active in mining, exploration and processing of uranium as well as in manufacturing supplies for this industry. More than half of these companies are based in Canada, with the rest dominated by Australian and U.S. firms, making this a true global uranium ETF. Started in November 2010, it is the only ETF on the market with a pure focus on uranium.

• The Market Vectors Uranium+Nuclear Energy ETF issued by Van Eck Associates (Symbol: NLR) tracks the DAXglobal Nuclear Energy Index. Its holdings contain 23 securities of companies worldwide with their focus on the nuclear energy industry. While it is thus not a pure uranium stocks ETF, its exposure is broader than URA’s. The regional distribution of these companies is very evenly allocated, with the U.S. and Canada making up over 50%, Japan 25% and Europe and Australia the rest.

The Nikkei 225 Index And the Japanese Economy

The Nikkei 225 is a stock market index comprised of 225 stocks of companies listed on the Tokyo Stock Exchange in Japan. It was introduced in 1950 and covers all sectors of Japan’s economy, updating its constituent stocks once a year. The Nikkei, as it is usually called, is the most important and best known Japanese stock index, comparable to the Dow Jones index in the U.S.. It is the broadest existing index of major Japanese companies and consequently very representative of the overall Japanese economy itself. Its unusual development in the past 30 years mirrors Japan’s economical trajectory: The Nikkei peaked at the end of 1989 and has since lost again over 80% of its value.

Investing in the Nikkei represents the most obvious way to participate in economical developments in Japan. Many troubling facts are responsible for the Nikkei’s drop over the last 20 years, among them the high national debt and Japan’s aging population. Still, a Nikkei ETF is a transparent way to participate in Japan’s most prestigious index. Those with a negative outlook on Japan need to look for other investment forms, as no short Nikkei ETF is currently existing or known to be in preparation.

The Nikkei 225 ETF

The planned Nikkei ETF mentioned above has just revealed the first pieces of solid information: It will be issued by Precidian Investments and will be called “Nikkei 225 ETF“, using the symbol NKY. Its expense ratio will be set at 0.50%. As this information has been released in early June 2011, its launch is expected soon afterwards.

However, keep in mind that this fund has not yet been officially released, therefore, information may still change before its actual start.

This introductory overview article is intended for investors who are looking for natural gas ETF information regarding investment opportunities related to the market for this commodity, but who have no previous experience with natural gas investments. We will first cover the basics regarding natural gas itself and the reasons why people consider investing in this resource, followed by a detailed look at the major exchange-traded funds (ETFs) available in the market and their specific features. The explanations are kept deliberately simple in order to provide a clear first impression and do not contain performance data. Rather, our natural gas ETF list is intended as a starting point: If you are actually considering an investment in one of these funds, use this list as a basis when searching for more specific information available on the web.

Natural Gas: The Basics

Natural gas is a naturally occuring resource which is extracted from the ground, where it is found either together with oil or alone in natural gas fields. It consists mainly of the gas methane and contains up to 20% of other gases, which have to be removed through processing before the gas becomes usable.
The biggest producers of natural gas are the United States and Russia, which provide about 20% each of the worldwide production. Iran, the European Union and Canada each contribute between 5-7% to the world total, while smaller amounts of natural gas are found in most countries worldwide.
Being a gas, natural gas is much more difficult to transport and store than -for example- oil. Pipelines are needed to transport it from the well to the locations where it will be used, requiring large investment and maintenance costs.
There are three major uses for natural gas:

• industrial use for the production of fertilizers, plastics and fabrics,
• domestic use, both residential and commercial, mostly for cooking and heating,
• use for the generation of electric power in gas-powered plants.

Each of these uses make up approximately one third of the total in the U.S., with innovative uses like gas-powered cars and hydrogen generation amounting to less than 10%.

Natural Gas: The Investment Case

The major reason why many investors consider an investment in natural gas is the assumption of strongly rising demand for this fuel in the coming years and decades, while the supply is supposed to remain constant or rise much more slowly than demand.
The main reason for this rise in demand for natural gas is an assumed overall increase in the demand for energy due to the continuing industrialization of emerging economies, coupled with growing environmental concerns. Gas as the cleanest known fuel for combustion is superior to all other energy sources regarding emissions and climate effects, especially since nuclear energy seems unlikely to grow further due to its lack of political support.
On the other hand, supply is supposed to be severely constrained because natural gas wells deplete very quickly. In recent years, the development of new wells has been barely able to compensate this effect, even though the economics of opening new wells have been very favorable.

Natural Gas ETF Investment Options

We will separate the ETFs available on the market with an exposure to natural gas into three categories, namely ETFs tracking

1. an index composed of future contracts for natural gas,
2. an index composed of stocks of companies involved in the extraction and production of natural gas,
3. an index composed of stocks of companies whose business is closely related to the extraction and production of natural gas.

No ETFs exist which physically own natural gas, as the high costs of storing and transporting the gas would make such a fund impractical.
The natural gas ETF symbol is found in brackets next to the name.

1. Future-related Natural Gas ETFs

• The United States Natural Gas Fund (UNG) is the largest natural gas-related ETF by market capitalization. Issued by US Commodity Funds, it tracks a single short-term future on natural gas and offers a 100% exposure to natural gas.
• The iPath DJ-UBS Natural Gas Total Return Sub-Index Profile (GAZ) also tracks a single future contract on natural gas and therefore also offers a 100% exposure to natural gas. It is issued by Barclays iPath.
• The United States 12 Month Natural Gas Fund Profile (UNL) tracks several natural gas futures with different maturity profiles to reduce the danger of underperformance due to contango effects. Issued by US Commodity Funds, it also offers a 100% exposure to natural gas.

There also exist two much smaller future-related funds, the Seasonal Natural Gas ETN Profile (DCNG) and the Natural Gas Fund Profile (NAGS).

2. Production and Extraction Company Stocks-related Natural Gas ETFs

• The First Trust ISE-Revere Natural Gas Index Fund (FCG) issued by First Trust tracks an index composed of 30 stocks of companies who are primarily concerned with the extraction and production of natural gas, predominantly in the United States. While these stocks are naturally influenced by other factors than the price of natural gas as well, this fund has a very strong exposure to the underlying commodity.
• The S&P Oil & Gas Exploration & Production Select Industry Index (XOP) issued by State Street. This fund tracks an index composed of 36 stocks from the oil and gas production industry, limiting its true exposure to natural gas to less than one-half. It exclusively contains stocks from U.S. firms.
• The Dow Jones U.S. Select Oil Exploration & Production Index (IEO) issued by iShares again tracks an index composed of 58 stocks from the oil and gas production industry, limiting its true exposure to natural gas to less than one-half. It exclusively contains stocks from U.S. firms as well.
• ProShares also offers two leveraged natural gas ETFs, the Ultra Oil & Gas (DIG) and the UltraShort Oil & Gas (DUG). Both track the Dow Jones U.S. Oil & Gas Index composed of 90 stocks from the oil and gas industry, with a leverage of 2x and 2x inverse, respectively.

3. Natural Gas ETFs Tracking Company Stocks Indirectly Related to the Production of Natural Gas

• The SPDR S&P Oil & Gas Equipment & Services ETF (XES) issued by State Street tracks an index composed of 25 stocks from equipment manufacturers and suppliers of the oil and gas industry. It is therefore only indirectly and partially exposed to natural gas, among many other factors. Over 85% of these stocks are U.S.-based.
• The Dynamic Oil & Gas Services Intellidex Index (PXJ) issued by Invesco PowerShares tracks an index containing companies similar to the XES mentioned before, sharing its characteristics and being more than 95% U.S.-focused.

Like all articles on our ETF Infos site, this short overview is meant to provide readers without much previous exposure to copper ETFs or commodity ETFs in general with a short but comprehensive copper ETF list including the relevant copper ETF symbol. This compilation will give you basic copper ETF information and a first impression of available funds to choose from for a possible investment in copper.

Overview of Available ETFs

Currently, five Exchange-Traded Funds fulfill the requirements for a targeted copper investment. In general, as with any commodity ETF, there are three ways to track the price of copper with an ETF: first, by actually buying, storing and selling physical copper. Second, by holding copper future contracts, and third, by holding stocks of companies active in the mining and extraction of copper. Of the five funds presented in our copper ETF list below, two fall in the second category and three in the third. Some of them, however, do not only target copper, but also other industrial metals such as nickel and aluminum.
Currently, there are no ETFs for physical copper available, however, two major fund managers (iShares and JPMorgan) have applied for the permission to start such funds.

The Five Copper ETFs Currently on the Market

1. iPath Dow Jones-UBS Copper ETN (JJC)
   This is the “cleanest” copper-tracking fund on the market, targeting the Dow Jones-UBS Copper Subindex Total Return index, which currently consists of the single Copper High Grade Futures contract as traded on COMEX. Being based on futures, it carries the general risk of roll-over costs common to all future-based index funds. As the futures price curve is presently inverted, however, future prices are lower than the current spot price. This is at the moment an advantage for the fund.
   This fund is not a real ETF, but an ETN, which is actually a senior debt issued by the fund’s managing bank Barclay’s. Therefore, it is subject to counterparty risk.
   Its expense ratio is 0.75% and its tracking error is currently 0.57%. The copper ETF symbol is JJC.
2. PowerShares DB Base Metals ETF (DBB)
   This is the second futures-based ETF with an exposure to copper. Unlike the JJC, it tracks the DBIQ Optimum Yield Industrial Metals Index Excess Return index. This index contains futures for the three industrial metals copper, nickel and aluminum in almost equal shares, so that only about 35% of the index is due to the copper price.
   Its expense ratio is 0.75% and its tracking error is currently 0.76%. The copper ETF symbol is DBB.
3. First Trust ISE Global Copper Index Fund (CU)
   This ETF is the first of three funds based on copper mining-related stocks. It tracks the ISE Global Copper Index, which consists not only of copper mining companies, but also of extractors of other metals. The index tries to approximate a true copper-only exposure by weighting the share of each company by the percentage of its revenue made with copper mining only. Geographically, over two thirds of the mining companies in the index are located in Canada and Europe, with Canada and the United Kingdom alone making up over half of the index.
   Its expense ratio is 0.70% and its tracking error is currently 0.61%. The copper ETF symbol is CU.
4. Global X Copper Miners ETF (COPX)
   The COPX tracks the Solactive Global Copper Miners Index, which consists of stocks of pure copper mining companies only. While there is significant overlap with the CU fund, in includes several smaller miners as well. Its geographical exposure is even more strongly concentrated on Canada and Europe at over 75%, again with Canada and the United Kingdom being responsible for more than two thirds of the index.
   Its expense ratio is 0.65% and its tracking error is currently 0.48%. The copper ETF symbol is COPX.
5. Emerging Global Shares Emerging Markets Metals & Mining ETF (EMT)
   This stock-based ETF again invests in mining and extraction companies active in the field of industrial and precious metals, such as copper and nickel, and gold and platinum, respectively. While its copper exposure is lower than 50%, its unique aspect is its geographical focus on miners in emerging markets. In these countries, the demand for copper has increased significantly in recent years, favoring these mining companies.
   Over half of the miners making up the Dow Jones Emerging Markets Metals & Mining Titans Index tracked by the EMT fund are located in Asia and Latin America, mainly in China and Brazil, with a significant minority in South Africa.
   Its expense ratio is 0.85% and its tracking error is currently 0.78%. The copper ETF symbol is EMT.

This basic copper ETF information is meant to provide an overview of which investment opportunities exist in the copper ETF market. With the possible start of physical copper ETFs in the near future, this copper ETF list will be expanded to include any newcomers.