Copper Miners ETF Is Showing Why You Need to Tread with Caution

Investing requires balancing risk and reward. Investor emotions often get in the way, leading people to take on outsize risks because they fear missing out on gains. Copper Miners ETF's (NYSEMKT: COPX) recent performance highlights the problem with chasing returns. Here's what you need to know.

Copper Miners ETF: What goes up can also go down

Over the past year, the price of Copper Miners ETF has nearly doubled. That's a huge gain, noting that the S&P 500 index (SNPINDEX: ^GSPC) rose "only" 16% over the same span. It can be hard to watch an investment that is rocketing higher and not want to jump aboard for the ride.

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However, there's an interesting side note to consider here. Copper Miners ETF's gain over the last year includes the recent decline of more than 25%. That decline, meanwhile, occurred in less than a month. The ETF has recovered some of the lost ground and is now just 18% or so below its 52-week high. However, the recent drawdown was the second 20%+ decline over that span, with a couple of 10% drops also thrown in for good measure. This copper-focused mining portfolio is not appropriate for risk-averse investors.

Volatility is normal for Copper Miners ETF

Copper is an industrial commodity. Supply and demand have a huge impact on the price of the metal and, thus, the financial results of companies that produce copper. Given its industrial uses, economic activity is also very important to monitor. Copper miners tend to be highly cyclical stocks.

There's another small wrinkle here, too. The Copper Miners ETF owns companies that mine for copper, but many also produce other commodities. That includes precious metals, which can be quite volatile in their own right. When all is said and done, before buying, you have to understand that Copper Miners ETF's recent volatility is fairly normal for a commodity-related ETF.

Is Copper Miners ETF a good or bad investment?

The truth is that Copper Miners ETF is neither good nor bad. It really depends on your goal. If you are looking for an easy way to gain exposure to the copper market, the ETF does that while also giving you the benefit of a diversified portfolio along the way. However, you shouldn't buy the ETF just because it has risen dramatically.

Indeed, you need to understand the volatile nature of the copper market before you step aboard, or you'll likely find you've taken on more risk than you bargained for. And that could lead you to buy high and sell low, which would be a terrible investment outcome.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.