USCF’s Hyland: First Copper ETF Overdue
November 18, 2011
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(This article previously appeared on HardAssetsInvestor.com, and is republished here with permission.)
This month, United States Commodity Funds, which is behind the $1.1 billion United States Oil fund (USO), launched the United States Copper Index Fund (CPER), the first copper-based, exchange-traded fund in the U.S. While the fund is the first ETF to target the copper market, it does join two copper-based, exchange-traded notes: the iPath Pure Beta Copper ETN (CUPM) and iPath Dow Jones-UBS Copper Total Return ETN (JJC). Hard Assets Investor Managing Editor Drew Voros caught up with John Hyland, chief investment officer for United States Commodity Funds, to discuss the launch and issues surrounding copper as a commodity.
Hard Assets Investor: Why did you think a copper ETF was necessary?
John Hyland: For the last four or five years, I’ve been making the point to people at various ETF and commodity conferences that eventually every major, actively traded commodity or a commodity at an active futures market was eventually going to have at least one ETF that essentially equitizes the futures contract.
When we launched USO [the United States Oil Fund] in 2006, I would tell people that there are 40 to 45 commodities that trade around the world with reasonable amounts of activity in the futures world. But there are another 40 or 50 that are obscure. Of that, there's two dozen or so that trade a decent amount and trade in the U.S. or London. And copper is the most important and most actively traded, really, of the industrials. And, because its use is so ubiquitous, many people feel that it’s a very good proxy as a commodity for what’s going on in the real economy — that if the real economy, on a global basis, is growing, then demand for copper grows, and vice versa.
On that basis alone, it was worth a look. It hadn’t been done yet as an ETF in the United States. It was an opportunity for our firm to actually do it without being the third or fourth to market. If you look at longer-term trend lines for commodities in general — say over the last 30 years — just looking at industrial metals, copper tends to really be a strong performer.
Because of the way copper resonates with the real economy and because of the fact that it tends to be supply constrained are good reasons for a copper ETF.
HAI: How do the underlying contracts work?
Hyland: Copper trades in two markets. It trades in New York on the COMEX and on the LME in London. We elected for COMEX as the basis, although we quite easily could have chosen the LME.
As for the methodology, the fund is based on another index created by SummerHaven Index Management that minimizes contango. Unlike like a first-generation index approach that says, “I’m always going to be in copper. And I’m always just going to own the first- or second-month contract,” this index was designed around the notion that “I’m always going to be in copper if the market is in backwardation.”
When copper is in backwardation, you have low inventory. What the index would do is take 50 percent of the index and put it in whichever contract in the front four months is most backwardated. It doesn’t have to be month one. It could be month two or three. The other half is put into the second-most backwardated of the front four. You're basically going to put money at the front of the curve, because you're in backwardation where the front end of the curve tends to do better.