Commodity trading has been choppy this year on weak macro
fundamentals and sluggish global trends in broad categories. Yet,
one commodity in the soft commodities space - cocoa - is enjoying
soaring prices and has been among the top performers this year
based on supply concerns and growing global demand.
This is particularly true with the
iPath Dow Jones-UBS Cocoa Subindex Total Return ETN
as well as the
iPath Pure Beta Cocoa ETN (
as these have added nearly 20% in the year-to-date time frame
2 Commodity ETFs Offering Investors Sweet
Both of these are clearly outpacing the broad PowerShares DB
Agriculture Fund (
) and PowerShares DB Commodity Index Tracking Fund (
), as these are seeing losses in mid single digits YTD. This is
primarily attributable to recovering demand in the U.S. and Europe,
as well as production problems in West Africa.
Season Fueling Demand
Demand for cocoa is rising rapidly across the globe thanks to
ever-increasing chocolate consumption. Cocoa grinding (indicator of
chocolate demand) rose 4.7% in Europe and 8.25% in the U.S. in the
third quarter, on an annual basis. This trend is expected to
continue into the fourth quarter ahead of Christmas (read:
Play a Resurgent Europe with These ETFs
Further, demand for chocolate is rising rapidly in India ahead of
the country's major festival (Diwali). Chocolate demand is up
nearly 40% despite growing concerns of contaminated sweets and
abnormally high dry fruit prices, according to the Associated
Chambers of Commerce and Industry of India.
Moreover, chocolate consumption is also growing in markets like
Brazil, Mexico, Columbia and China. As a result, various industry
experts predict global cocoa demand to rise nearly 30% by 2020,
suggesting optimism and growth in the cocoa industry.
The global cocoa market looks to be in a production deficit for the
next four consecutive years, according to the International Cocoa
Organization (ICCO). The agency recently raised its cocoa deficit
to 86,000 metric tons from 52,000 metric tons for the season
2012-2013. It also expects a deficit of 70,000 metric tons of cocoa
for the current season 2013-2014, which started this month.
About two-thirds of global cocoa supply comes from West Africa with
the Ivory Coast and Ghana being the two largest producing nations.
Both nations are seeing bad weather conditions of late, raising
prices of cocoa (also read
Coffee ETFs: More Weakness Ahead?
Excessive rainfall, as much as 150% above the normal level, in the
second half of October in the two countries is an added threat to
cocoa harvest. This would lead to higher prices for cocoa at least
for the near term, suggesting that investors may want to look to
these exchange-traded options to play the commodity:
NIB in Focus
This ETN tracks the Dow Jones-UBS Cocoa Subindex Total Return. The
index delivers returns through an unleveraged investment in the
futures contracts on cocoa and currently consists of one futures
contract on the commodity.
The product is a bit expensive as it charges 75 bps in fees per
year. It trades in small volumes of nearly 36,000 shares a day on
average, a level that could increase the trading cost in the form
of a wide bid/ask spread.
The note is also unpopular and has attracted $45 million in assets
this year. NIB currently has a Zacks ETF Rank of 3 or 'Hold'
CHOC in Focus
This note seeks to match the performance of the Barclays Cocoa Pure
Beta Total Return Index. Unlike many commodity indexes, this one
can roll into one of a number of futures contracts with varying
expiration dates, as selected, using the Barclays Pure Beta Series
2 Methodology (read
all the agricultural ETFs here
This approach might result in less contango. This can be an
important factor, as shifting from month to month in contracts can
eat away at returns during an unfavorable market situation.
Further, investors should note that CHOC is illiquid with a paltry
volume of less than 3,000 shares a day, suggesting a wide bid/ask
spread. As such, investors may have to pay extra beyond the annual
fee of 75 bps in fees per year. This ETN also has a Zacks ETF Rank
of 3 or 'Hold' rating.
Given bullish fundamentals at least for the near term, investors
should consider these soft commodity ETNs in order to ride out the
soaring cocoa prices. This could be especially true if holiday
demand remains strong, or if supply issues remain in place,
suggesting cocoa ETFs could offer some sweet returns to close out
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IPATH-PB COCOA (CHOC): ETF Research Reports
PWRSH-DB AGRIC (DBA): ETF Research Reports
PWRSH-DB COMDTY (DBC): ETF Research Reports
IPATH-DJ-A COCO (NIB): ETF Research Reports
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