Time To Buy The Tin ETF?

September was a pretty rough month for commodities across the board. A partial government shutdown as well as concerns over raising the debt ceiling continued to put pressure on this corner of investing. While the commodities in the precious and industrial space have given dull performances of late, tin is the only metal that is moving higher.

In fact, iPath Dow Jones-UBS Tin Subindex Total Return ETN (JJT) was up over 4% in the trailing past month, clearly outpacing the broad PowerShares DB base metals Fund (DBB) and PowerShares DB Commodity Index Tracking Fund (DBC) by wide margins. Further, the product has been the best performer in the industrial metal space from a year-to-date look.

This is especially true thanks to continued supply constraints, as well as the new rules in Indonesia that are discouraging exports (read: Indonesia ETFs Slide on More Currency Troubles).

Further, according to the recent report from Standard Bank Group, tin prices will likely continue to surge and would outperform the main industrial metals, including copper, zinc and lead, going forward. This is primarily thanks to a supply shortage and a lack of new mining projects to produce more tin.

Indonesia: The Real Booster

About two-fifths of the global tin supplies come from Indonesia, the world’s second largest producer and the biggest exporter. Effective August 30, the Indonesian policy regarding tin export has changed. The new rule requires that the metal must trade on a local exchange before the shipments.

Though the new rule is part of wider government efforts to enhance the value of commodity shipments, it has taken a toll on exports. Exports from Indonesia tumbled to a six year low in September as shipments of tin used in smartphones and packaging plunged 88% from August.

The policy change and the lower export from Indonesia suggest bullish fundamentals for tin at least for the short term. As such, investors could easily take advantage of this trend by focusing on the only pure play tin ETF in the market, which we have highlighted in greater detail below.

Tin ETF in Focus

This product provides exposure through an unleveraged investment in the futures contracts on tin. It tracks the Dow Jones-UBS Tin Subindex Total Return, which consists of one futures contract on the commodity.

The product is a bit expensive as it charges 75 bps in fees per year. It trades in paltry volumes of less than 3,000 shares on an average daily basis that increases the trading cost in the form of a wide bid/ask spread. The fund has managed to accumulate assets worth $4.2 million.

JJT is down about 2.71% in the year-to-date period. The ETF currently has a Zacks ETF Rank of 2 or ‘Buy’ rating implying that there is significant bullishness facing the ETN in the months ahead.

State of Backwardation: A Positive Factor

Moreover, JJT is currently benefiting from the roll yield. Roll yield is the positive or negative return that occurs when a futures index or ETF rolls from the near month’s contract to the next month’s contract.

The roll yield is positive when the futures market is in backwardation and negative when the futures market is in contango. Basically, if the price of the near month contract is higher than the next month futures contract, then this is backwardation.

Currently, the tin market is in backwardation, which is bullish for the commodity and the tin ETF, JJT. A market in backwardation signifies that demand exceeds supply boosting tin prices higher.

Bottom Line

Given that tin prices seem to be on the rise with supply/demand imbalances, JJT could be an interesting pick for investors looking to make a concentrated play on tin in the industrial metals market.

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