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ETF News And Commentary

Thanks to global supply/demand fundamentals, food prices in the U.S. are on the rise this year. Prices jumped 0.4% in February, representing the largest increase in two and half years. The biggest increase came from the items served at breakfast such as meat, diary, poultry, fish, eggs, bread, coffee and juice.

While tight cattle supply due to years of drought in states such as Texas and California, coupled with rising milk demand in fast-growing Asian countries led to the surge in meat and dairy prices, spreading piglet virus is weighing on pork supplies, resulting in rising prices for lean hogs (read: Looking for Lean Hog Rally Play? Try These ETFs).

In the futures market, coffee prices soared about 60% in the first three months as the worst drought in Brazil sparked fears of shrinking supply for the second consecutive year. Orange juice futures are up nearly 11% as ‘citrus greening’ disease is damaging Florida’s orange crops.

Further, droughts in California and unusually cold weather in other parts of the country are also affecting the supply of vegetables and fruits, leading to higher prices.

Unfortunately, these trends are unlikely to reverse anytime soon and could deal a blow to low-income consumer pockets. This is because Americans expect to pay 2.5–3.5% more on groceries this year according to the U.S. Department of Agriculture, while wage increases will be just 3% according to the U.S. Bureau of Labor Statistics.

Based on the fundamentals, investors could easily make some profits from surging food prices through a number of ETFs or ETNs with lower risk and partially increase their spending power. Any of the three products could make for a good choice if the current trends continue (see: all the Agricultural ETFs here).

iPath Dow Jones-UBS Livestock Subindex Total Return ETN ((COW - ETF report))

This note tracks the Dow Jones-UBS Livestock Subindex Total Return, which delivers returns through futures contracts on livestock commodities. The benchmark provides 60% exposure to live cattle and the reminder to lean hogs.

The product charges 75 bps in fees per year and has amassed $57.1 million in its asset base. It trades in average volume of about 21,000 shares a day, suggesting additional cost in the form of a wide bid/ask spread. The ETN has added over 17% year-to-date but has a Zacks Rank of 5 or ‘Strong Sell’ rating. Though the long-term outlook is bearish, the product is likely to get a near-term boost on extremely bullish industry trends.  

iPath Dow Jones-UBS Coffee Subindex Total Return ETN ((JO - ETF report))

This ETN follows the Dow Jones-UBS Coffee Subindex Total Return, which delivers returns through an unleveraged investment in the futures contracts on coffee and currently consists of one futures contract on the commodity (read: Coffee ETFs Soar on Brazil Drought Concerns).

The product trades in good volumes of more than 243,000 shares on average daily basis, ensuring slightly extra cost in the form of relatively tight bid/ask spread. Expense ratio came in at 0.75%. The note has attracted $100.9 million in assets so far this year and is up over 61% in the year-to-date time frame. JO currently has a decent Zacks Rank of 3 or ‘Hold’ rating.

E-TRACS UBS Bloomberg CMCI Food ETN ((FUD - ETF report))

This fund tracks the UBS Bloomberg CMCI Food Index Total Return and provides wide exposure to a portfolio of agricultural and livestock commodity futures through a single investment. The commodity futures contracts are diversified across three constant maturities from three months up to one year.

In terms of holdings, a big chunk of the assets is tied to sugar at 24%, closely followed by soybeans (19%) and corn (16%). The product is less popular and illiquid with AUM of $25.9 million and average daily volume of less than 10,000 shares. The ETN charges 65 bps in annual fees and has gained about 14% so far this year. The product has a Zacks Rank of 3 or ‘Hold’ rating (read: Commodity ETF Investors Are Riding a Sugar High).

Bottom Line

These products are clearly leading the commodity space higher and are expected to continue their bullish trend given unfavorable weather conditions and some concerns on specific commodities.

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