Commodity ETF investing has been pretty rocky this year thanks to erratic product performances in recent months. Some commodities like natural gas, cotton and cocoa have been on a tear posting incredible gains in the period, while others like corn, soybeans or any of the precious and industrial metals have seen extreme weakness (read: 3 Commodity ETFs Still Going Higher).
In the soft commodity space, weakness has abounded. One of the worst performing products was undoubtedly sugar, as the sweet commodity has fallen by double digits in the year-to-date period amid a record harvest from Brazil and a surplus in other key countries as well.
Production in Key Markets
Brazil, which is the largest sugar producer in the world, has seen conditions improve greatly in recent weeks. This has come at a key time since the nation is now harvesting its crop while many are also speculating that the solid weather will increase production and force traders to get rid of more contracts. This creates a bearish situation for the sweet commodity presently, with huge of supplies coming on to the market.
In fact, the International Sugar Organization expects that Brazil will produce 40.3 million metric tons of sugar this year, up 15% from the previous season. This would be the largest ever supply from Brazil this year (read: Is It Time to Buy the Brazil ETF (EWZ)?).
Meanwhile, India, the second biggest producer of the crop on earth, also has an uncertain outlook for sugar. While demand remains sluggish, supply has been on the rise. According to various sources, India would produce 24.6 million metric tons of sugar this year versus a demand of 23 million metric tons.
This trend of supply/demand imbalance would definitely keep a lid on sugar prices in the weeks ahead (read: Two India ETFs Leading Emerging Markets Higher). This could be especially true if the dollar remains firm, and investors seek equity plays thanks to the solid trend in the domestic stock market.
As a result, the global sugar supply is expected to outstrip demand by 8.5 million metric tons in the current season, which ends on Sep 30. This excessive supply, along with the weak momentum in the sugar market, will continue to put pressure on the prices throughout summer.
Sugar ETF Investing
Currently, there are three choices available in this poorly performing space. Instead of staying invested in these ETFs, investors should probably avoid or pair with another commodity ETF that has a better outlook in short/long pair trade (read: Trade Goldman's Commodity Picks with These ETFs).
Though the short-term outlook is negative for sugar ETFs, the long-term trend remains in the neutral zone with all the three sugar ETFs having Zacks Rank of 3 or ‘Hold’ rating.
iPath Dow Jones-UBS Sugar Subindex Total Return ETN
Launched in Jun 2008, this is the most popular product providing exposure to sugar. 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 index currently consists of one futures contract on the commodity of sugar (see more in the Zacks ETF Center).
The note is quite expensive as it charges 75 bps in fees per year and it is somewhat illiquid. It trades in low volume of 16,000 shares on average daily basis that increases the trading cost in the form of bid/ask spread. The product has attracted $27.8 million of assets and lost about 12% of its value so far in 2013.
Currently, the sugar futures market is in the state of contango which is bearish for the sugar and the sugar ETF which rolls continuously into front-month contracts. This is because those who continuously roll must buy more expensive contracts each time, a bad situation if sugar contract prices fall closer to spot as the expiration approaches.
Teucrium Sugar Fund (CANE - Free Report)
This product provides investors direct exposure to sugar without the need for a futures account. Unlike many commodity ETFs, the product doesn’t just cycle into the next month as expiration approaches, rather it uses a much more in-depth approach.
The ETF uses three futures contracts for sugar, all of which are traded on the ICE Futures exchange. The three contracts include (1) the 2nd-to-expire contract, weighted 35%, (2) the 3rd-to-expire contract, weighted 30%, and (3) the contract expiring in the March following the expiration month of the 3rd-to-expire contract, weighted 35%.
Teucrium believes that this spread out approach can reduce contango and thus help investors achieve better returns during unfavorable commodity environments. However, this strategy could backfire in times of market backwardation, as the product could gain less from the roll as it might have if it was just shifting from one month to the next (read: Time to Sell This Commodity ETF?).
The fund has amassed just $2.4 million in its asset base since inception in Sep 2011 and is less liquid with a very small daily trading volume. The product is the high cost choice in the space as it charges a fee of 162 bps per year.
Further, a large bid/ask spread increases the cost of investment to those who are looking to make a quick trade. CANE is down 11.66% year-to-date.
iPath Pure Beta Sugar ETN
Launched in Apr 2011, this ETN seeks to match the performance of the Barclays Sugar Pure Beta Total Return Index. Unlike many commodity indices, the index rolls into one of a number of futures contracts with varying expiration dates, as selected, using the Barclays Pure Beta Series 2 Methodology.
The note is illiquid with a paltry volume of less than 1,000 shares, suggesting a wide bid/ask spread. As such, investors have to pay extra beyond the annual fee of 75 bps in fees per year. The product has managed assets of $2.4 million and lost 12.51% so far in the year.
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