Copper is one of the hottest metals this year, up 17% so far and near record highs. While there are several compelling reasons to own the metal, the commodity needs to be handled with some caution.

There are plenty of reasons to be bullish on copper over the long term. The red metal is at the center of some long-term growth sectors -- electrification, defense and artificial-intelligence data centers -- that are less cyclical than construction.

The more bullish factor is supply. Copper ore grades are declining, pushing up the cost of extracting copper, and mine projects face high permitting and regulatory hurdles. A copper mine discovered today could take nearly two decades to start production.

Based on the known pipeline of copper mine projects, the International Energy Agency forecasts that primary copper supply -- excluding scrap -- could be 25% lower than demand by 2035. Copper prices must rise above $20,000 per metric ton, or $9.07 per pound, to spur enough mining investment to meet long-term demand, estimates a study published earlier this year by a group of researchers co-led by Adam Simon, earth and environmental sciences professor at the University of Michigan. That is about 37% above today's prices.

While those price targets look tempting, copper also seems vulnerable to a correction over the near term. Copper's red-hot rally this year reflects a dislocation, according to Charles Cooper, head of copper research at Wood Mackenzie. Since the White House last year said it would consider a 15% tariff on refined copper, buyers have been snapping up the metal and hoarding it in U.S. warehouses to get ahead of potential levies.

As a result, the U.S. is swimming in copper, while the rest of the world is in a deficit.

Globally, the copper market is expected to face a surplus this year, but that is concentrated in the U.S. Excluding the U.S., the world is expected to face a deficit of 460,000 metric tons, according to Cooper.

For now, industry analysts expect the U.S. to maintain ambiguity on the tariffs at least until after the midterm elections as it grapples with inflation concerns. But with prices near record highs, one risk is that copper starts selling off if it starts to shrug off the U.S. tariff risk, either because the White House announces that it won't impose tariffs or because the market starts believing that is the case.

Anything that instills doubt in the tariff could cause a "knee jerk reaction" on copper prices, sending them lower, notes Tom Mulqueen, metals strategist at Citi.

Further interest rate hikes, more oil market disruptions or an AI-stock selloff also could cause a copper price pullback. But those are the types of drops that could offer investors a more attractive entry point into copper.

How to take advantage of any opportunities has its own nuances and risks.

There are two ways for individual investors to get exposure to copper as a commodity. One is the United States Copper Index Fund, which holds U.S. copper futures. Another is the Sprott Physical Copper Trust, a closed-end fund that actually holds the physical commodity. Each has unique caveats.

For the United States Copper Index Fund, which holds futures, America's copper hoarding has created a problem. Because so much copper is stockpiled in the U.S., the cost of copper futures for near-term delivery is cheaper than for further-out delivery -- a futures curve shape described as contango. Whenever the fund sells a soon-to-expire contract for a more distant one, it has to pay a higher price, creating a drag on performance.

This near-term copper discount relative to further-out futures is between 5% to 6% on an annualized rate, which is historically steep, according to Ilia Bouchouev, director of the Commodities Quant Lab at Carnegie Mellon University. This unfavorable futures-curve shape, plus the fund's 0.9% fee, explains why the fund is up about 14% year to date, lagging behind copper futures by about 3 percentage points.

The Sprott Physical Copper Trust doesn't have the same problem because it holds the physical commodity. However, it does come with a heftier fee of 1.4%, partly reflecting the cost of storing the metal.

Plus, an investor parking money in this fund forgoes today's high interest rates. The futures fund, by contrast, keeps a sizable cash balance in short-term Treasury bills to meet margin and collateral requirements.

The one potential opportunity -- and risk -- of the Sprott Physical Copper Trust is that its market price is about 8.5% cheaper than its net asset value. This isn't uncommon with closed-end funds, including those that own physical gold or silver.

The discount reflects investors' broader market concerns about the Middle East conflict and inflation, according to John Ciampaglia, chief executive of Sprott Asset Management. While the discount could be enticing, the risk is that the price might not converge with the NAV. For most of the Sprott Physical Copper Trust's existence, it has traded at a discount to NAV.

This year, the fund added some redemption options to attract investors to arbitrage this spread, according to Ciampaglia. This includes an option for investors to redeem their copper holdings for cash at 95% of NAV, as well as an option for investors to take the physical copper if they can meet the minimum threshold of 100 metric tons. In practice, only the first option will be accessible to most investors.

Both funds offer decent ways to gain exposure to copper for those looking to capitalize on the metal's long-term supply challenges. But investors shouldn't assume their performance discount to copper will naturally narrow, or assume that it can't get worse.