Thanks to the ongoing geopolitical tensions in Russia, the energy commodity world has been in the limelight this year and has been performing quite well. Though that’s the case, there have been several winners in the soft commodity space too. Some commodities, such as sugar, have made fresh highs and are continuing with their uptrend (read: Top Ranked Energy ETFs and Stocks Set to Roar Higher).
A global supply glut for the past four years had led to huge stockpiles leading to a slump in sugar prices. However, things are expected to look up this year and prices likely to take a U-turn. Extreme weather conditions in Brazil – the world's biggest producer and exporter of sugar – are expected to adversely hit sugar supply.
Moreover, a potential El Nino this year, a warm-water phenomenon that seldom develops off the Pacific coast of South America, is expected to bring extreme conditions to Brazil Which looks to impact sugar production as well (read: Will Coffee ETFs Continue to Brew Returns in Q2?)
Also, El Nino can bring extreme dry weather to India – the world’s second largest sugar producer – which again will hit sugar crops.
While the supply for sugar is dwindling, the demand for sugar is quite strong. Global sugar consumption is expected to increase by 2.3% this year, which might give a further boost to sugar prices. China imported 411,132 tons of sugar last month, almost double the amount it imported last year.
Given the worsening supply situation expected in two of the most crucial sugar producing nations, Brazil and India, and a growing demand for sugar worldwide, there might be a global deficit for the sweet commodity. This is expected to give a breather to sugar prices and might bring an end to the bear market in sugar (read: Commodity ETF Investors Are Riding a Sugar High).
Expecting sugar prices to climb in the near term, a look at a top ranked fund in the Agricultural ETF space would be the best option to capture this uptrend:
About the Zacks ETF Rank
A look at a top ranked Agricultural ETF can be done by using the Zacks ETF Rank. This technique provides a recommendation for the ETF in the context of our outlook of the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors as well.
The aim of our model is to select the best ETFs within each risk category. We assign each ETF one of the five ranks within each risk bucket. Thus, a Zacks ETF Rank reflects the expected return of an ETF relative to other ETFs with a similar level of risk.
Using this strategy, we have found one ETF that has a Zacks ETF Rank #2 (Buy)– iPath Dow Jones-UBS Sugar Subindex Total Return ETN (SGG - ETF report) – which we have highlighted in greater detail below (see all Agricultural ETFs here).
SGG in Focus
With an asset base of $35.8 million, SGG is the most popular option in the sugar ETN market. The fund tracks the Dow Jones-UBS Sugar Subindex Total Return, giving investors exposure to futures contracts on sugar.
The index consists of one front month futures contract on sugar for exposure. The product charges 75 basis points as fees and has an average traded volume of 26,395 shares a day.
Also, the product’s low correlation of 0.23 with the broad market index S&P 500 is expected to provide diversification benefits to any portfolio.
Though the product plunged 21% in 2013, it has posted a decent performance in the last three months. SGG has returned 11.3% in the past three months, though returns year-to-date is just at 2.6%. But with some of the supply demand constraints coming down the pike, this fund might be an interesting pick for investors seeking a top ranked commodity play at this time
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