Coffee ETFs: Which Cup of Joe is Right for You?
October 10th, 2012 at 4:15pm by Tom Lydon
The world’s insatiable thirst for coffee has made the commodity one of the most active futures contracts on the market. The average retail investor, though, does not need a commodities brokerage account to gain exposure to coffee as there are exchange traded notes that provide access to coffee’s price movements.
Currently, there are two ETNs that track coffee price movements: the iPath Dow Jones-UBS Coffee Subindex Total Return ETN (NYSEArca: JO) and the iPath Pure Beta Coffee ETN (NYSEArca: CAFE). Both ETNs have a 0.75% expense ratio.
The Dow Jones-UBS Coffee ETN tracks coffee futures. Consequently, investors may suffer losses if the futures market is stuck in contango – the fund rolls contracts as they expire, and if the later-dated contract costs more than the spot price, the fund will lose money as it rolls into the next month contracts. [Backwardation and Contango]
The Pure Beta Coffee ETN also tracks coffee futures, but upon maturity of the futures contract, the ETN may roll into one of a number of futures contracts with varying expiration dates. As a result, the greater variety will help the fund pick and choose futures contracts, which will diminish the affects of contango or backwardation on returns.
ETNs are unsecured debt obligations that are subject to the credit worthiness of an issuing bank. [Exchange Traded Notes]
JO is geared toward active traders who want to either speculate on coffee prices or execute quick trades on the commodity, writes Daniela Pylypczak for Commodity HQ. On the other hand, CAFE is for those who are looking to achieve coffee futures exposure but also want a way to mitigate the adverse affects of contango, Pylypczak added.
Coffee futures were down over 4% Friday as investors engaged in profit taking and lower prices triggered sell-stop orders, reports Alexandra Wexler for the Wall Street Journal.
“There’s no upside, so there’s new speculative selling,” Jack Scoville, a vice president at Price Futures Group, said in the WSJ article. “[Speculators] are closing out more long positions [bets that prices will rise], I suspect.”
Additionally, better weather conditions in Brazil, a major producer of coffee, have also pressured prices.
“It’s a classic weather market,” Shawn Hackett, president of Hackett Financial Advisors, said in the article. “The forecast [in top-producer Brazil] was for two or three weeks of dry weather, but now they’re saying it might rain.”
For more information on coffee, visit our coffee category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.