Aluminum Showing No Rust

06/07/2011 2:02 pm EST

Focus: COMMODITIES

Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

The industrial metal has held up much better than silver during the recent correction, and could serve as a portfolio diversifier, writes Doug Fabian, editor of Making Money Alert.

Just as aluminum is a substitute for more expensive materials in finishing the facades of homes, it also is a viable alternative for investors interested in commodities. While silver (SLV) is among the commodities that have seen a decided pullback of late, aluminum actually is holding up fairly well.

I just read that the world’s largest aluminum producer, Russia’s UC RUSAL, predicts a strong rise in demand for the metal, particularly from China—and that demand could help drive up prices.

One great thing about aluminum is that it never rusts, and I’m pretty sure the following three ETFs aren’t likely to rust either. If anything, they may begin attracting more investor interest. I am currently watching the following three funds that have aluminum exposure.

PowerShares DB Base Metals (DBB)
This fund is the granddaddy of aluminum ETFs. It isn’t a pure-play like the other ETFs that I’ll mention, since it also invests in copper and zinc. [Aluminum and copper currently account for 35% slices of the portfolio, with the balance devoted to zinc—Editor.]

Nevertheless, you might want to consider this fund if you like some diversity in your holdings.

The April/May slide interrupted what otherwise was an upward trend in this fund. That situation may give you a discounted entry point for this ETF. [The price action has improved notably in the last two weeks, with the ETF reclaiming its 200-day moving average and creeping up on the 50-day in recent action—Editor.]

Global X Aluminum ETF (ALUM)
This ETF replicates the Solactive Global Aluminum Index, which invests in aluminum mining and smelting companies. Most of its holdings are aluminum giants. Alcoa (AA) and Rio Tinto (RIO) comprise about a quarter of the index.

However, it only launched on January 4, and it has yet to generate the kind of daily trading volume that I like to see before considering a fund as a potential recommendation.

iPath DJ-UBS Aluminum Subindex (JJU)
Short of a private stash of aluminum, this exchange traded note provides the most direct exposure to aluminum. The index it seeks to replicate, the DJ-UBS Aluminum Subindex, reflects the most likely returns available if you went long on unleveraged aluminum futures.

In other words, the iPath ETN buys contracts that promise aluminum shipments at a certain price some time in the future. Once again, this is a fund that still needs to boost its average daily trading volume significantly before I would consider recommending it.

The recent dip in the prices of commodities could turn out to be a short-term correction in an otherwise upward trend. You may want to consider buying an ETF that invests in aluminum or other commodities as part of an overall diversification strategy.

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