INTERVIEW-Investors buy copper ETFs as see macro turning point
* Physical copper ETF triples assets over two weeks
* Investors who cannot invest in futures opt for ETF
* Attracts asset managers, private banks
LONDON, Feb 1 (Reuters) - Investors who believe the global economy has hit a turning point towards growth have piled into base metals exchange-traded funds (ETFs), London-based ETF Securities said.
Assets in ETF Securities' physical copper fund have nearly tripled to $47.5 million in the two weeks up to Jan. 24, and weekly flows hit an all-time record.
Assets in the firm's fund that tracks copper futures has grown by about a fifth so far this year to $534.7 million, and another fund tracking broad industrial metals has climbed by 18 percent to $243.1 million.
Most ETF investors have had longer time horizons than those using futures on the London Metal Exchange (LME), the world's biggest market for industrial metals, said Nicholas Brooks, head of research and product strategy.
"They look for medium-term macro turning points as entry and exit points, reacting less to short-term news. I think many investors believe we are currently at a macro turning point," Brooks said in an interview.
The benchmark LME copper price touched the highest levels in 3-1/2 months on Thursday after recent economic data showed recovery in the United States and top metals consumer China. It was up 0.4 percent at $8,195 a tonne on Friday afternoon.
ETF Securities' investors include large and medium-sized asset management firms who manage funds including multi-asset and global macro funds, as well as private banks, he added.
UNAFFECTED BY CONTROVERSY
ETF Securities has avoided the controversy around plans by JP Morgan and Blackrock to launch ETFs backed by physical copper.
Metal fabricators and other users have challenged U.S. regulatory approval of the copper funds, arguing that they would siphon off physical copper, distort the market and artificially boost prices.
The ETF Securities product did not stir up the same level of criticism as JP Morgan's, partly because the European approval process does not include a public comment period as is required in the United States, Brooks said.
Also there was less investor interest in base metals about two years ago when it was launched, and the global economy was weaker, he added.
The JP Morgan fund has the potential to become very large after obtaining approval from the Securities and Exchange Commission to store LME copper valued at as much as $499.8 million, equivalent to about 62,000 tonnes at a price of $8,000 a tonne.
Currently, the ETF Securities physical copper fund has 6,013 tonnes of copper in storage. There was no size limit placed upon the fund when European regulators approved it.
Brooks declined to comment on whether physical copper ETFs planned by JP Morgan and Blackrock would be successful if they overcame consumer objections.
FUTURES VS PHYSICALS
Many of the investors in base metal ETFs have specific reasons, sometimes linked to their own investment rules, for not putting their cash in LME futures, Brooks said.
"Most of the investors using commodity ETPs (exchange-traded products) tend to be multi-asset - some with strategic mandates, some with tactical mandates, some with a combination of the two," he said.
"In most cases they either do not have the mandate to use futures or they do not want to deal with the margin, rolling and other issues involved with going into futures markets directly."
Some investors opt for the futures-tracking copper ETF due to its larger size and liquidity, while others look at the storage costs of the physical ETF versus the impact of a contango or backwardation on the futures fund, he said.
Currently, with the copper market in a mild contango, the cost issues are not significantly different. The contango shaves 0.1 percent off returns from the futures-tracking ETF, and storage costs taking about 0.2 percent off the physical ETF.
"If you're in a severe contango, and we've been there, and it's negative 3 percent for example and the storage cost is only 0.2 percent, it would be rational to go into the physical," Brooks said.
If the market moved into a backwardation, that would give a strong advantage to the futures-based fund.
"There are some investors who are opting for the physical just because of the counterparty risk issues - with the physical backing, some investors are more comfortable with that structure," Brooks said.
(editing by Jane Baird)