Under The Hood: Dr. Copper

Considering all the attention copper gets as an economic bellwether, equity-based copper ETFs don't get as much fanfare. Sure, the universe is limited to two important players and it wouldn't be accurate to describe either as "undiscovered," but they aren't the most popular kids at the ETF party either. That may because neither is all that old, but age aside, for the investor that wants copper exposure without playing the futures market and without playing strictly Freeport McMoRan FCX, equity-based ETFs are the way. Let's go under the hood with one, the First Trust ISE Global Copper Index Fund CU. Give First Trust some credit for the catchy ticker. "CU" is copper's identification on the periodic table of elements, but let's get down to business. All of 54 weeks old, CU holds 29 stocks with about 6% going to Freeport, the largest U.S. copper miner, and another 6% to Rio Tinto RIO, the world's largest mining company. From there, the constituents become much less familiar to many investors given CU's international slant. Southern Copper SCCO is one of just a few other CU holdings that is listed in the U.S. Then again, this is the nature of the beast with copper. As of the end of 2010, the U.S. accounted for just 11.5% of CU's weight, ranking it third behind Canada and the U.K. among CU's country allocations. Australia, Peru and Switzerland are other top country weights. With an expense ratio of 0.7%, CU is a tad more expense than its chief rival, the Global X Copper Miners ETF COPX, which chages 0.65%. That means an investor needs to ask: "What's the benefit to CU's higher fees?" Well, in the past six months, CU has outperformed COPX by about 3%, more than enough to make up for the higher fees. With average daily volume of 370,000 shares and $429.4 million in assets under management, it appears most folks that like CU aren't too concerned with the expense ratio. After all, one of the primary reasons for being involved with CU is to get exposure to copper and its high-beta ways without the extreme volatility of the futures market. For investors, CU represents a sound option to fill a void in the materials portion of your portfolio. On the other hand, short-term traders will like the beta of 1.6 and an average trading range of a $1.20.