The METLDEX, a futures contract from MCX with its iCOMDEX Base Metal Index as the underlying index, which is based on five base metals — aluminium, copper, lead, nickel and zinc — is a good tool for portfolio diversification, say market participants.

Naveen Mathur, Director - Commodities and Currencies, Anand Rathi Share and Stock Brokers, says: “As per various studies, inclusion of commodities in a portfolio to an extent of 10-15 per cent results in better risk adjusted returns. MELTDEX futures would meet this objective…Investors who all the while had only bullion can now also have base metals.”

Also read: MCX Metaldex logs ₹102 cr turnover on debut

METLDEX futures can fill a void in the Indian market in the absence of base metal ETFs, say experts. Here’s a look at five features of METLDEX futures:

Low correlation with equity and bullion: Considering the period 2016-2020 (till September 2020), the correlation between the Base Metal Index and Nifty 50, on the basis of returns, is about 0.13 only. Further, the METLDEX futures have low correlation with gold, too. During the above mentioned period, the correlation between the MCX METLDEX futures and MCX BULLDEX futures on the basis of returns, has been approximately 0.145, per MCX data. The correlation between METLDEX futures and MCX Gold futures is 0.09.

Cash settlement: In metals futures, if a trader keeps the position open during the delivery/tender period (the last five days of the contract), it will be marked for delivery. In METLDEX futures, however, there is no such threat. Besides, without delivery, the associated costs such as delivery margins are non-existent. Delivery margins are usually 25 per cent. For a copper contract of lot value ₹13,25,000 at current prices, for instance, the delivery margin to be maintained in the tender period will be ₹3,31,250.

Also read: MCX handles record base metal delivery over 2 years

Low cost: The contract value is about ₹6 lakh (₹12,000 x lot size, which is 50 units) and the initial margin works out to ₹50,000-60,000. This is far cheaper than trading a lot of single metal futures. A copper futures contract with a lot value of about ₹13,25,000, at current prices, will have an initial margin of ₹1,22,400. Likewise, a zinc futures contract with a value of about ₹10,30,000, at current prices, will have an initial margin of ₹1,15,875. Thus, the initial margin of METLDEX is comparatively less.

Breakeven in 2 ticks: A two tick movement will provide breakeven (i.e. cover the cost) for the trader. Let’s explain this: Cost of trading for a member includes CTT, stamp duty and SEBI fees (MCX is currently not levying any transaction charges). With METLDEX value at about ₹12,000 and lot size of 50 index units, the cost of trading is about ₹75-80 for a contract value of about ₹6 lakh (12,000 x 50). With lot size of 50 index units, one tick gives a profit of ₹50 and two ticks ₹100. Thus, a two tick movement will cover the costs of the trader.

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