ETF would need to store about 50 million tons of copper in some warehouse. Since it is likely that the copper will be held for years (if not indefinitely), it is likely that the copper would need to be held in a climate controlled facility to keep the copper from deteriorating.With the cost of a facility, delivery costs, as well as security, it would seem that the management fee would need to be very high.In my opinion, none of the physical commodity ETFs make economic sense and should probably be banned. All they do is permanently remove the commodity from the market artificially driving up the price and thus manipulating the market. They are unlike futures contracts which are used for price discovery.
Not so sure.. I think that commodity hoarding can be accomplished more easily with futures contracts than it can be with physical commodities. Along with the fundamental reasons why commodities have risen in price is that futures contracts (and in the case of copper forward contracts) allow people to demand copper without really wanting copper and thus driving up the price. In 2008, there were Congressmen calling for banning crude oil futures because hoarding in the futures markets had driven prices up beyond any reasonable price changes due to changes in supply and demand. ETF's can be redeemed in the form of the underlying creation units. Thus, an investor who wanted lots of copper off the pile could collect enough ETF shares to constitute a creation unit and then take delivery of the copper. This process keeps the ETF price in line with the physicals price and simply means that big copper users can ensure themselves a constant supply of copper unlike with futures and forwards contracts when copper is provided only under the settlement term,s of the contract which are lumpy. However, all that copper could theoretically be bought up by a copper producer who wanted to buy all the shares of the ETF outstanding (obviously, that would cause all kinds of weird stuff to happen). The other interesting thing that this does is to create the cash and carry arbitrage in the futures/forwards markets. I think I've told people a gajillion times that there is no cash and carry with copper forwards because you can't store and transport tons of copper. If someone is already storing it for you, you can buy a creation unit of the ETF and sell copper forward and we now have most of the cash and carry available. That keeps futures/forwards prices in line with physicals (they are not necessarily in line now). I agree that management fees will probably be high but I am excited to find out how high.
It makes sense if you are interested in speculating in the price of copper, which is dangerous business. At least ETF is less risky than futures.
It is all really just a means to prey on low information people.
