Copper ETFs: What They Are and How They Work

While not a precious metal like gold or silver, copper is an important metal used for everyday purposes, including electrical wiring, piping, motors, construction, and coins. Some investors would like to add copper to their portfolios, but physically owning the metal involves shipping and storing heavy material.

Instead, many turn to exchange-traded funds (ETFs) to gain exposure to this market. There are a few types of copper ETFs, and it’s important to consider the pros and cons of copper before investing in them.

What Are Copper ETFs?

Copper ETFs are designed to allow you to invest in the copper market without physically owning and storing the metal. Instead, you can buy shares in the ETF like in any other ETF or stock. The fund’s managers then work to ensure that the fund’s price moves in line with the price of copper, either by physically buying the metal or using derivatives to mimic the price movement.

Copper has become more popular with investors as demand has increased. For example, BlackRock, a major provider of funds and ETFs, launched its copper ETF in June 2023 because of the growing popularity.

Understanding Copper as a Commodity

Copper is an essential commodity because it has many applications in industries such as technology and construction. You likely have dozens of devices and other products with copper near you right now.

One important use for copper is in electrical wiring. Most modern homes have copper wiring and may use copper plumbing because of its efficient electric conductivity. Copper is also used for heating and cooling systems, telephone and internet cables, and motors.

Copper is also suitable for alloying. Combined with zinc, tin, or nickel, it can be used to create materials like brass, bronze, and nickel that have applications in building large ships or musical instruments.

Because of its ability to predict economic turning points, copper is sometimes called “Dr. Copper.” Investors follow its price and use it as a leading indicator of the global economy. If demand for copper falls, causing the price to drop, it may suggest weakening demand in the global economy.

Here are some things to review that influence the price of copper:

• Construction activity
• Demand for electronics
• International relations between purchasers and suppliers
  

How Copper ETFs Work

Copper ETFs come in a few different forms. Some aim to track the value of the commodity, while others also track the performance of companies in the industry, such as copper mining firms. Given that the success of copper-producing businesses is closely tied to the value of copper, the price of copper plays a big role in how the ETFs perform.

For example, the iShares Copper and Metals Mining ETF (ICOP) holds shares in companies like Freeport-McMoRan Inc. and Grupo México, major producers of copper.

Meanwhile, the United States Copper Index Fund (CPER) tracks the price of copper directly. It does not invest in companies that mine or produce copper. Instead, it uses futures contracts to mimic its price changes.

Benefits and Risks of Investing in Copper ETFs

Before investing in a copper ETF, you should consider both the benefits and the risks of the metal.

Benefits of Copper ETFs

A significant benefit of investing in copper ETFs is diversification. Many investors focus on securities like stocks and bonds. Exposure to a commodity adds a new asset class to your portfolio, further diversifying your investments.

ETFs are also highly liquid. You can buy or sell shares in a copper ETF whenever the market is open, so it’s easy to add to your investment or to cash out as needed.

Some investors also think that demand for copper will continue to rise. That, combined with the fact that the supply of copper is not growing as fast, means that it might increase in price over the long term.

Risks of Copper ETFs

A key risk of investing in copper is that the value of the metal is closely tied to the overall state of the global economy. It may not provide as much diversification as you desire.

You may also have some exposure to the metal already if you own index funds, because those funds own shares in copper miners and other copper-related businesses.

Copper prices can also be volatile. From January 2019 to January 2024, copper swung in price drastically. Starting at about $6,000 per 1,000 kilograms, it fell to less than $4,800 at the onset of the coronavirus pandemic before spiking to more than $10,500 in 2021. It later fell back to almost $7,000 and sits around $8,250 as of this writing. Some months saw price swings of more than $1,000.

That level of volatility can be difficult for investors to handle. If you need to sell your investment to cover other expenses, you may be forced to sell at a loss because of volatility.

Types of Copper ETFs

There are three main types of copper ETFs. Each aims to track the value of copper but works in slightly different ways, so consider the pros and cons of each approach before you select a fund.

Physically Backed ETFs

Physically backed commodity ETFs hold the actual commodity—in this case, copper. The benefit is that you can expect the fund to track the value of copper because it owns the metal. However, the cost of shipping, receiving, and storing the metal can be high, so these funds may have high fees.

Equity ETFs

Equity ETFs focus on owning shares in businesses related to the copper industry. For example, the iShares Copper and Metals Mining ETF owns shares in mining businesses.

These funds may have lower expense ratios than those of physically backed ETFs because it’s cheaper and easier to own shares in businesses than to buy and store physical metals. However, while the fate of copper mining and other related companies is tied to the price of copper, they may not mimic the price of copper as closely.

Futures-Based ETFs

Futures-based ETFs rely on derivatives, primarily futures, to mimic changes in the price of copper.

The benefit of this strategy is that, when executed correctly, the fund’s price movements should match the movements of copper. However, the fund is exposed to additional derivatives risks, including rolling risks, as they move futures into new contracts. They may also have fewer tax advantages if they’re a limited partnership.

What to Consider When Investing in Copper ETFs

When investing in copper ETFs, you need to study many of the same factors that you’d consider when investing in other ETFs, as well as a few specific to copper.

The first thing to look at is the expense ratio of the ETF. As a percentage of your invested assets, you’ll pay this amount for investing in the ETF. The higher the expense ratio, the more it costs to invest, so look for a fund with a lower expense ratio. Nevertheless, this is one aspect of an ETF; a poorly managed fund with a lower expense ratio could cost more in the long run.

The size of the fund is also important. ETFs with more assets and trading volume will be more liquid. That means it’s easier to buy and sell shares in the fund. Investing in a fund with few assets and low liquidity may mean it will be harder to sell your shares or there will be a wider bid-ask spread.

For commodity ETFs, it’s important to consider the type of fund you’re investing in. Do you prefer a futures-based ETF or an equity ETF, with all the pros and cons that either choice entails? You should also look into the ETF’s tracking error, which is the difference between its price movements and the price movements of copper as a commodity. If your goal is to get exposure to the price of copper, look for funds with fewer tracking errors.

Top Copper ETFs

If you’re looking to invest in a copper ETF, consider these funds:

United States Copper Index Fund (CPER)

The United States Copper Index Fund (CPER) is a futures-based ETF that aims to track the change in price of copper, minus the fund’s expenses.

The fund has the highest expense ratio of the three funds highlighted, at 0.97%. This means that investors will pay more to invest through the fund. It is also relatively small, with assets of just over $121 million, so trading volume can be low.

iShares Copper and Metals Mining ETF (ICOP)

The iShares Copper and Metals Mining ETF (ICOP) is an equity-based fund. It aims to give investors exposure to copper by owning shares in businesses related to copper, including mining businesses. Its benchmark index includes both American and non-American businesses, so investors get exposure to the global copper industry.

The fund is smaller than CPER, with less than $5 million in assets. This may be explained by its relatively young age. The fund was started in June 2023.

Though its lack of assets is a concern and could mean liquidity is low, it has the lowest expense ratio of these highlighted funds, at 0.47%. That could make it appealing to investors looking for a low-cost way to get exposure to copper.

Global X Copper Miners ETF (COPX)

The Global X Copper Miners ETF is the largest of these three funds, with $1.35 billion in assets under management. Like ICOP, COPX is an equity-based ETF, owning shares in copper miners and related businesses.

The expense ratio of the fund is a middle point between the two other funds highlighted, at 0.65%.

Because this fund has the most assets, it’s likely to be more liquid than the other two funds on this list. That could make it appeal to investors who wish to make more frequent trades and who do not want to deal with low trade volume.

How to Invest in Copper ETFs

To start investing in copper ETFs, follow these steps:

Open a Brokerage Account

To invest in ETFs of any kind, you’ll need a brokerage account. Opening a brokerage account is relatively easy and can be completed online.

To select a broker, consider things like account minimums, fees, and ease of use. Once you’ve chosen your preferred broker, you can open an account from the broker’s website. During the process, you’ll need to provide some personal information, like your address and Social Security number. You’ll also have to link a bank account that you can use to fund the brokerage account.

Fund Your Brokerage Account

Once you’ve opened a brokerage account, you’ll need to fund it with the money you want to invest. Some brokers will let you place orders and pull the money directly from a linked bank account, while others will make you deposit it to your brokerage account first.

Each broker has a different process for funding your account, but it usually involves making an online transfer to send money to your brokerage account’s settlement fund. This is usually a money market fund that you can draw money from to buy securities.

Select an ETF to Invest in

After funding your brokerage account, you’ll need to choose an ETF to invest in. Be sure to consider each fund’s pros and cons, expense ratio, and whether it tracks the price of copper effectively.

Place a Buy Order

Finally, it’s time to place an order to buy shares in your selected ETF. Each brokerage has a different process for placing a buy order, but you’ll typically specify the ETF and number of shares you want to buy.

You can use either a market order or a limit order. Market orders buy shares immediately at the best available price, while limit orders allow you to limit how much you’ll pay per share, but the risk is that the order may not fill if the price does not get to the limit you have set.

Using a limit order may be safer for low-volume ETFs, like some copper ETFs. If fewer shares are available, a market order could lead to you paying more than expected.

Tax Implications of Copper ETF Investments

Investing does involve taxes, so it’s important to have a plan for dealing with them.

If the fund you invest in pays dividends, the tax treatment of those dividends will depend on whether they are qualified dividends or unqualified dividends.

Qualified dividends are those paid by a U.S. or qualifying foreign company whose shares you held for at least 60 days during the 121-day period that began 60 days before the ex-dividend date and ends 60 days after the ex-dividend date. All other dividends are unqualified.

Qualified dividends are taxed at the lower long-term capital gains rate, while unqualified dividends are taxed at your regular income tax rate.

When you sell your shares, you’ll deal with capital gains taxes. If you earn a profit from the sale, you’ll pay tax on the gains. If you hold the shares for more than one year, you’ll pay long-term capital gains, which can be 0%, 15%, or 20%, based on your income. Profits from shares held for a year or less are taxed at your normal income tax rate.

Your broker should report your dividends and gains to the Internal Revenue Service (IRS) and provide you with tax forms such as 1099-DIV and 1099-B. You can then report your capital gains and dividend income to the IRS when filing your annual tax return.

The Bottom Line

Copper ETFs allow you to invest in the copper market without buying and storing the actual metal. If you want to add diversification to your portfolio by investing in commodities, ETFs can be an option.

Before investing, however, consider the pros and cons and think about whether a futures-based or equity-based ETF is suitable for you.