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 Exchange-traded funds 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.
There are both commodity futures-based and equity-based ETFs offering exposure to the aluminum market. One of the primary ETFs available in this asset class is actually an exchange-traded note (ETN). 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 U.S. Basic Materials ETF (IYM) and the iPath Series B Bloomberg Aluminum Subindex Total Return ETN (JJU).
In March 2018, President Trump imposed a 10% tariff on aluminum imports and a 25% tariff on steel imports, with exemptions for Canada and Mexico.
1. iShares U.S. Basic Materials ETF (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 fund holdings such as Alcoa (AA) and Newmont Mining (NEM). This ETF aims to track the investment results of an index composed of U.S. equities in the basic materials sector. The fund is designed to provide exposure to U.S. companies involved with raw materials production, including metals, chemicals, and forestry products.
The ETF has an expense ratio of 0.43% and offers a modest dividend yield of 1.42%. 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.
2. iPath Series B Bloomberg Aluminum Subindex Total Return ETN (JJU)
For investors seeking a more direct investment in aluminum, there is the iPath Series B Bloomberg Aluminum Subindex Total Return ETN. This ETN aims to mirror returns potentially available through an unleveraged investment in aluminum futures contracts. The underlying index represents one aluminum futures contract that is continually rolled over into the next nearby trading month.
The fund has an investor fee rate of 0.45% per year. Since this is a futures-based product, there is no dividend yield. Barclays Bank PLC is the issuer of this ETN.