Must-Know: Why Is XME Correlated to Copper Prices?



Copper prices

Previously in this series, we’ve noted that more than half of the SPDR S&P Metals & Mining ETF’s (XME) holdings are invested in the steel sector. Intuitively, steel industry’s performance—which in turn depends heavily on steel prices—should be the key driver of XME’s performance.

In this part of the series, we’ll do a quantitative analysis of XME’s performance, plotting it against different commodities.

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Correlation with copper prices

The graph above shows XME’ performance plotted against various commodities. As you can see, XME’s performance has diverged from the movement of commodities prices.

However, this is not surprising as commodity companies’ share prices are generally more volatile compared to the underlying commodities due to their earnings sensitivity.

Moreover, stock markets should start factoring in higher commodity prices in the future. As a result, commodity companies’ price movements run ahead of the underlying commodity prices when the cycle is turning around for the better.

However, looking at XME’s correlation with commodities, we get some interesting results. XME has the highest correlation with copper, as can be seen in the chart above. This is surprising because Freeport-McMoRan (FCX) is the only copper producer in which XME has invested.

Correlation with steel prices

Looking at steel, though, XME has had a high correlation with spot hot rolled coil (or HRC) prices over the long term. We have seen XME’s correlation with spot HRC prices fall this year.

This tells us how steel stocks, including U.S. Steel Corporation (X) and AK Steel (AKS), have run ahead more than the rally in steel prices on expectations that steel prices would continue to surge higher. Furthermore, HRC prices have been a late entrant to the steel price rally, which has been dominated by the surge in cold rolled steel products.

Aluminum and gold (GLD) have historically had a lower correlation with XME. Now, copper’s high correlation with XME does not really tell us anything about a causal relation between these two. Having said that, several economists consider copper prices to be a barometer of the global economy.

In the next part of this series, we’ll explore the factors that could drive XME’s performance in the coming months.


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