There has been ample chatter regarding the destruction of the
"risk on" trade. Predictably, "risk off" has bolstered the
fortunes of the U.S. dollar,
a situation that will be a thorn in the side of
plenty of sector ETFs
.
The dollar's resurgence and the repudiation of risk on has
been dour news for myriad commodities ETNs as well. Oil has been
a predictable victim, but other commodities have been badly
beaten in recent weeks. That troublesome roster includes
agricultural and soft commodities, among others.
Here is some friendly advice: Avoid the following commodity
ETNs for now. Those with a sense of adventure and a strong
stomach should consider shorting them or using put options when
applicable.
iPath DJ-UBS Sugar TR Sub-Index ETN (NYSE:
SGG
)
Sugar is arguably one of the most volatile commodities to trade
in the world, and while it is safer for the average investor to
be involved with SGG than sugar futures, this ETN does not skimp
on volatility. Currently trading just over $74, SGG was trading
around $94 three months ago. In July 2011, this was a $106
ETN.
In the U.S., sugar is also highly regulated. The federal
government imposes import quotas on major sugar-growing nations,
with the exception of Mexico. This supposedly protects American
sugar farmers and puts a floor on prices, but no one really knows
where SCG's floor is. Brazil, India and China
are the world's three largest sugar growers
. Remember this about sugar as an investment thesis: this is a
trade not an investment. After all, sugar is given away free of
charge at most restaurants in the U.S.
iPath DJ-UBS Cotton TR Sub-Index ETN (NYSE:
BAL
)
The iPath DJ-UBS Cotton TR Sub-Index ETN makes this list despite
jumping almost 9% in the past five trading days. That may sound
like an accomplishment, but it does not obfuscate the fact that
BAL has plunged 18.3% year-to-date. The 9% weekly pop also does
not hide the fact that in March 2011, BAL was flirting with
$111.
Cotton prices may finally be low enough to encourage China to
do some dip buying, which the country has been known to do when
prices fall. The problem is that production by the world's
largest cotton exporter--the U.S.--is expected to rise this
season. Rather than short BAL, investors can initiate long trades
on apparel makers that have previously cited high cotton prices
as a drag on their profits.
iPath DJ-UBS Natural Gas TR Sub-Index ETN (NYSE:
GAZ
)
This
decline was seen coming a mile away
. GAZ gained infamy in the days following the VelocityShares
Daily 2x VIX Short-Term ETN (NYSE:
TVIX
) debacle because GAZ was another ETN trading at a substantial
premium to its closing indicative value, providing arbitrageurs
with an easy opportunity to deflate that premium by shorting this
ETN.
What is worrisome is not the recent volatility in natural gas
prices, rather, it is the fact that even though GAZ has lost
42.1% in the past three months, the ETN still trades at a
significant premium to its daily indicative value. GAZ currently
trades for just under $3. Its daily indicative value is $1.93,
according to the iPath Web site
.
iPath DJ-UBS Coffee TR Sub-Index ETN (NYSE:
JO
)
If not for Green Mountain Coffee Roasters (Nasdaq:
GMCR
), JO could easily be the worst-perfoming coffee-related security
in 2012. Year-to-date, the ETN is off more than 34%, but that
looks good compared to Green Mountain's 52.8% plunge. JO has seen
its share price nearly cut in half since September 2011.
Arabica coffee futures traded in New York fell to a two-year
low on Tuesday. Adding further pressure to coffee prices are
expectations for strong supplies out of Brazil, the world's
largest coffee producer, for the next two seasons.
For more on short opportunities with ETNs, click
here
.
(c) 2012 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.