Introductory Guide to Soft Commodity ETFs - ETF News And Commentary

The broad commodity space has regained momentum this year with most of the items performing exceptionally well on a combination of supply constraints and rising demand. However, the gains seem limited in the agricultural space including softs – a group that includes products such as coffee, cocoa, sugar and cotton.

While coffee and cocoa are seeing huge gains, sugar and cotton are crumbling from a year-to-date look. The major culprit for the weakness in these two soft commodities is the broad oversupply trend resulting from accelerated crop plantations and rising stockpiles. This supply glut tends to impact soft and agricultural commodities more than the other corners of the commodity world. Further, the political standoff between Russia and the West, escalating tensions in Ukraine and a strengthening dollar have taken a toll on the prices of the soft commodities.

Given the mixed fundamentals, it is better to shed some light on each commodity and the related ETNs one at a time (see: all Agricultural ETFs here).

Coffee ETNs

Coffee prices have been on fire this year with iPath Dow Jones-UBS Coffee Subindex Total Return ETN (JO) and iPath Pure Beta Coffee ETN (CAFE) returning 75% and 70%, respectively. This is primarily thanks to a reduced production outlook in Brazil due to the worst drought in decades, which has damaged crops more than expected.

This trend is likely to continue at least in the short term given increased demand and weather woes in Central America. Additionally, USDA projects global coffee production to drop by 1.5 million bags for the 2014–15 season. Investors should note that JO is the top performing ETF of 2014 and follows the Dow Jones-UBS Coffee Subindex Total Return, which seeks to deliver returns through one futures contract on coffee.

The product trades in solid volumes of around 182,000 shares on average daily basis and charges 75 bps in annual fees from investors. The note has attracted $92.3 million in assets so far and has a Zacks ETF Rank of 5 or ‘Strong Sell' rating (read: Is the Incredible Run in Coffee ETFs Finally Over?).

Cocoa ETNs

Cocoa prices are surging on the back of an insatiable chocolate demand across Asia, North America and emerging nations. However, rising production at Ivory Coast – the largest cocoa producing region – might weigh on the prices. This is because a favorable weather condition in the region would lift global cocoa output in the current season, after two consecutive years of decline.

According to the International Cocoa Organization (ICCO), the global cocoa market would see a surplus of 30,000 metric tons in the current season, which ends in October, that will likely turn to a small deficit of 100,000 metric tons in the next season. Given this, the bullish trend might continue in the coming days and investors could tap the opportunity with two products in the space – iPath Dow Jones-UBS Cocoa Subindex Total Return ETN (NIB) and iPath Pure Beta Cocoa ETN (CHOC). Both products have a Zacks Rank of 2 or ‘Buy' rating.

Out of the two, NIB is quite a popular and liquid option with AUM of $23 million. This ETN tracks the Dow Jones-UBS Cocoa Subindex Total Return, which delivers returns through an unleveraged investment in the futures contracts on cocoa. The note charges 75 bps in fees per year and trades in small volume of nearly 19,000 shares on average (read: Invest in Cocoa with These Top Ranked ETFs).

Sugar ETNs

Sugar prices remained under pressure from a global supply glut that outpaced demand and led to huge stockpiles. This is primarily due to a bumper crop year in the top growing regions in Brazil, India and Thailand despite the drought conditions. The International Sugar Organization projects global sugar surplus of 4 million metric tons in the current 2013–2014 season (ending September 30) and 1.3 million metric tons in the 2014–2015 season.

Though the oversupply situation is expected to ease in the next season, weak global demand and increased production are unlikely to support the rise in sugar price. This is especially true, as consumption needs to outstrip supply by at least 3-4 million metric tons in order to propel the price of the sweet commodity higher (read: Time for Top Ranked Sugar ETF: SGG).

In such a backdrop, the popular and liquid sugar ETN – iPath Dow Jones-UBS Sugar Subindex Total Return ETN (SGG) – has lost nearly 16% in the year-to-date time frame. The ETN tracks the Dow Jones-UBS Sugar Subindex Total Return, which delivers returns through an unleveraged investment in the futures contracts on sugar. The note has an expense ratio of 0.75% and has amassed $35.3 million in its asset base. Volume is light, ensuring additional cost in the form of a wide bid/ask spread.

Apart from this, investors have two other options targeting the sugar futures market – Teucrium Sugar Fund (CANE) and iPath Pure Beta Sugar ETN (SGAR). While CANE has provided almost flat returns, SGAR is down 7%. All the three ETNs have a Zacks Rank of 1 or ‘Strong Buy' rating.  

Cotton ETNs

Cotton is approaching the lowest level in five years on slowing demand in China which is the world's biggest consumer, record harvest in India and rising production in U.S. The USDA recently raised the cotton production forecast by 10% to 16.5 million bales for the 2014–15 season in the U.S., the world's biggest cotton exporter.

Given bearish conditions, two products – iPath Dow Jones-UBS Cotton Subindex Total Return ETN (BAL) and iPath Pure Beta Cotton ETN (CTNN) – have lost 15.8% and 13.2%, respectively, so far this year. Both ETNs have a Zacks ETF Rank of 5 (read: Cotton ETFs in Focus as Crash Continues).

BAL follows the Dow Jones-UBS Cotton Subindex Total Return, which delivers returns through an unleveraged investment in the futures contracts on cotton. The product has been able to manage $23.8 million in AUM and trades in average daily volume of roughly 14,000 shares. Expense ratio came in at 0.75%.

Broad Soft Commodity ETNs

Investors looking for a diversified exposure to a number of soft commodities rather than a particular play have two choices – iPath Dow Jones-UBS Softs ETN (JJS) and iPath Pure Beta Softs ETN (GRWN). Both target three soft commodities contracts – sugar, cotton and coffee. The ETNs are up 8.2% and 4.3%, respectively, year-to-date and have a Zacks ETF Rank of 5.

Though both are unpopular and illiquid, JJS comes with a slightly better AUM of $3.9 million and average daily volume of 6,000 shares. The note tracks the Dow Jones-UBS Softs Subindex Total Return and has 0.75% in expense ratio.

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IPATH-DJ-A COFE (JO): ETF Research Reports
 
IPATH-PB COFFEE (CAFE): ETF Research Reports
 
IPATH-DJ-A COCO (NIB): ETF Research Reports
 
IPATH-PB COCOA (CHOC): ETF Research Reports
 
IPATH-DJ-A SUGR (SGG): ETF Research Reports
 
TEUCRM-SUGAR FD (CANE): ETF Research Reports
 
IPATH-PB SUGAR (SGAR): ETF Research Reports
 
IPATH-DJ-A COTN (BAL): ETF Research Reports
 
IPATH-PB COTTON (CTNN): ETF Research Reports
 
IPATH-DJ-A SOFT (JJS): ETF Research Reports
 
IPATH-PB SOFTS (GRWN): ETF Research Reports
 
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