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In the two years since the stock market sank to a dozen-year low in March 2009, the prices of many metals — precious and industrial — have skyrockted.
Copper, often thought to be the most economically sensitive metal, since it is used in housing and appliances, began to rally two months before the stock market finally hit bottom, even though exchange inventories were still rising.
Investors now have a wide range of funds to choose from that offer exposure to precious and industrial metals, including both commodity funds that own physical metal and equity funds that own shares in metal producers.
With prices for copper, gold, and silver at or very near all-time highs, and a strengthening global economy promising to boost demand for those and other metals, it may make sense to look at ETFs that will benefit from this environment in the year ahead, especially for risk-tolerant investors and those with little or no exposure to commodities.
Metals and other commodities also provide a measure of protection against inflation.
The rise in metals prices is now flowing through to earnings for metals producers.
Standard & Poor’s Equity Analyst Leo Larkin sees gold and copper producers posting the strongest earnings-per-share gains for the first three months of 2011, mostly because of higher metals prices.
He has buy recommendations on three gold stocks: Newmont Mining (NEM), Barrick Gold (ABX), and Randgold Resources (GOLD). Aluminum producers will also likely show gains, and Larkin has a buy recommendation on Alcoa (AA).
“Steel will lag the other groups because pricing is not as robust and they will be more prone to a margin squeeze due to more rising raw materials costs,” Larkin says.
Leaving aside pure commodity funds, there are currently about 25 ETFs that invest in the producers of such metals as gold, silver, platinum, uranium, lithium, copper, aluminum, steel, and rare earths/strategic metals.
The oldest and largest of these funds is the $7 billion Market Vectors Gold Miners ETF (GDX), which was launched on May 16, 2006. More recently, five new funds launched over the past year.
For the group as a whole, performance over the 12 months to March 1, 2011 ranged from a 71% jump for the Market Vectors Junior Gold Miners ETF (GDXJ) to a 13% gain for the PowerShares Global Steel Portfolio (PSTL).
S&P’s quantitative methodology for evaluating ETFS uses nine different metrics relating to performance, cost, and risk. Just two ETFs have an “Overweight” recommendation on a performance basis, which incorporates STARS recommendations from S&P equity analysts, S&P’s Fair Value ranking, as well as a technical/chart-based indicator.