Exchange-traded funds, or ETFs, provide an alternative means of access for investors seeking potential profits within the aluminum market. Physical aluminum is not available as an investment asset in the same way as metals such as gold, silver and platinum. Aluminum futures are traded; however, many investors are unfamiliar with trading in the futures markets and are wary of using such highly leveraged investments. Some aluminum ETFs provide access to aluminum futures using an unleveraged investment that is traded like common stock on an exchange.
ETFs also provide a means of obtaining a globally diversified portfolio. One of the major advantages of ETFs is they provide much easier access to foreign equity markets than is traditionally available. This can be especially important to investors looking for opportunities in a commodity such as aluminum, where the bulk of the mining and production occurs in countries outside the United States. The world’s largest producers of aluminum ore include China, Australia and Russia.
Aluminum is most widely used in the industries of construction and packaging and in the automotive sector. Increased demand for lightweight aluminum in autos to improve fuel efficiency is one market price driver.
Trump's administration announced on March 1, 2018 that president Trump would formally sign the trade measures next week, which will impose tariffs of 25 percent on imports of steel and 10 percent on imports of aluminum.
There are both commodity futures-based and equity-based ETFs offering exposure to the aluminum market. The two primary ETFs available in this asset class are actually exchange-traded notes (ETNs), or ETNs. ETNs, although included with traditional ETFs, are debt securities, and therefore subject to credit risk in accord with the financial stability of the issuer.
Among the most popular ETFs investors use to obtain exposure to the aluminum market are the iShares Dow Jones U.S. Basic Materials Sector Index Fund (IYM), the iPath Dow Jones-UBS Aluminum Subindex Total Return ETN (JJU) and the Pure Beta Aluminum ETN (FOIL).
iShares U.S. Basic Materials Sector Index Fund (IYM)
The iShares U.S. Basic Materials ETF is not exclusively focused on aluminum but does offer the advantage of giving investors an equity-based ETF that contains some exposure to the aluminum market through major fund holdings such as Alcoa (AA) and Newmont Mining (NEM). This ETF aims to replicate the performance of the Dow Jones Basic Materials Index. The market cap-weighted index is a subindex of the Dow Jones U.S. Total Market Index and is designed to reflect the overall performance of companies engaged in the basic materials sector.
This BlackRock fund has an expense ratio of 0.44% and offers a modest dividend yield of 1.38%. It is most appropriate for investors who desire some diversified exposure to aluminum along with other stocks in the basic materials sector but prefer to maintain solely equity-based investments.
iPath Dow Jones-UBS Aluminum Subindex Total Return ETN (JJU)
For investors seeking a more direct investment in aluminum, there is the iPath Dow Jones Aluminum Subindex ETN. This ETN aims to mirror returns potentially available through an unleveraged investment in aluminum futures contracts, along with returns from collateral invested in U.S. Treasury bills (T-bills). The underlying index represents one aluminum futures contract that is continually rolled over into the next nearby trading month.
The fund’s expense ratio is 0.75%. Since this is a futures-based product, there is no dividend yield.
Barclays Capital is the issuer of this ETN.
Pure Beta Aluminum ETN (FOIL)
An alternative ETN to the iPath Dow Jones Aluminum Subindex ETN is the Pure Beta Aluminum ETN. This ETN, also issued by Barclays Bank and linked to the Barclays Capital Aluminum Pure Beta TR Index, is representative of an unleveraged investment in the price of aluminum futures contracts. However, the underlying index uses a different investment strategy from the iPath fund. The index selects futures contract months using Barclays’ Pure Beta Series 2 method that seeks to limit the effects of contango, where futures prices converge downward to meet spot prices at contract expiration. The fund also offers the returns available from cash collateral maintained in U.S. T-bills.
The fund’s expense ratio is 0.75%. Like JJU, the FOIL fund is a relatively higher-risk investment, most appropriate for investors seeking to speculate on aluminum futures prices.