At the end of September, U.S.-listed ETNs held $6.9 billion in assets, compared with the $697 billion held in ETFs, writes Matt Hougan for IndexUniverse. (What are ETNs?)

There are three key advantages they enjoy:

• When ETNs first came to the market, the investment vehicle proved to be popular among investors who were looking for access to difficult-to-target markets, such as commodities and certain foreign markets. Investors flocked to funds such as the iPath MSCI India (NYSEArca: INP) and iPath Dow Jones-UBS Commodity Index ETN (NYSEArca: DJP). There are ETFs that target these areas now, but ETNs still cover certain areas not yet covered by ETFs.

• ETNs promise perfect tracking – an investor receives the full return of the benchmark, minus costs. Commodity ETFs on the other hand do show some tracking errors. Any tracking error in an ETN is borne by the issuer; tracking error in ETFs are borne by the investor.

• ETNs also have the benefit of being treated like a zero-dividend stock for tax purposes. This means that you don’t pay taxes until you sell, and holding a commodity ETN longer than a year only costs an investor 15% long-term capital gains taxes when sold. Futures-based commodity ETFs are treated like futures, which means gains are marked-to-market each year and investors pay taxes on gains at 60%/40% long-term/short-term capital gains tax rate. Be sure to consult your tax professional for advice. (Are you ready for the taxman?)

A deterrent for ETNs investing is that they are unsecured debt notes. The ETN’s value depends on the credit of an issuing bank – if the bank bankrupts, you’re out of luck. Most ETNs, however, offer daily redemptions at net asset value. Potential ETN investors should note that the CFTC’s plans for regulation in the commodities market could force some ETNs to close down, but this remains to be seen. (Differences between ETNs and ETFs)

For more information on ETNs, visit our ETNs category.

Some of the more heavily traded ETNs include:

• iPath DJ AIG Lead TR Sub-Idx ETN (NYSEArca: LD): up 128.9% year-to-date
• iPath DJ AIG Sugar TR Sub-Idx ETN (NYSEArca: SGG): up 57.7% year-to-date
• iPath Dow Jones-AIG Commodity Idx TR ETN (NYSEArca: DJP): up 16.2% year-to-date
• iPath MSCI India Index ETN (NYSEArca: INP): up 82.4% year-to-date
• iPath S&P GSCI Crude Oil Ttl Ret Idx ETN (NYSEArca: OIL): up 16.1% year-to-date

Max Chen contributed to this article.

This week, sugar prices rose to highs not seen in 28 years as concerns over a global sugar shortage were realized. The October contract for sugar, which expired Wednesday, rose 0.66 cent to 24.12 cents per pound on the Coffee, Sugar & Cocoa Exchange, reports Sarah Lepro for Associated Press. (Why are people so sweet on sugar?)

Last year, poor weather and low crop production hindered the sugar harvest and now the commodity is coming up short. A dryer-than-normal growing season in India and too much rain in Brazil have hurt the crops in two of the biggest sugar-producing countries. (More on the coffee, cocoa and sugar outlook).

Jim Rogers, a commodities enthusiast, claimed last year that agriculture was a good place to be. Last year, he said he was going long on sugar. Since then, prices have doubled or tripled. Despite that, prices are still 70% off their all-time high, reports The Market Oracle. “I wouldn’t buy sugar right now, [but] I’m not selling it,” Rogers says.

For more stories about sugar, visit our sugar category. Be sure to be aware of the differences between ETFs and ETNs.

• iPath Dow Jones AIG Sugar TR Sub-Index ETN (NYSEArca: SGG): up 60% year-to-date

The price of commodities surged from March to June, but growth has slowed since then, remarks Harvey Jones for The Motley Fool. For the long-term, investment guru Jim Rogers thinks the current commodities bull market will run till 2022. (More on Jim Rogers).

The spike in commodities prices was attributed to Chinese demand for raw materials and financial speculators looking to offset potential falls in the dollar and inflation. (How to play a weak dollar). The rally was not driven by a global recovery in trade and economic activity. Eventually, countries and especially emerging markets will be demanding commodities to feed and drive their economies.

There is a possibility of deflation, which could quickly reduce commodity prices.

Individual commodities have many different factors that affect the their prices. Commodities have varying economic cycles, most are non-correlated to equities and some commodities prices change with the weather. One of the basic factors is that of supply and demand.

Rather than trying to guess which commodity will outperform, you may want to consider a broad-based ETF that gives exposure to the total asset class. Also be sure to have a strategy; you can read about the one we use here.

For more information on commodities, visit our commodity category.

• iShares S&P GSCI Commodity-Indexed Trust (NYSEArca: GSG): up 14.2% for the year; Almost half of the index reflects crude oil, and the balance is split between other energy products such as natural gas as well as agricultural commodities, industrial and precious metals and livestock.

• iPath Dow Jones-AIG Commodity Index Fund ETN (NYSEArca: DJP): up 17.1% for the year; has holdings in oil, copper, natural gas, gold, aluminum, zinc, sugar and more.

• PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC): up 13.7% for the year; has weightings in heating oil, natural gas, oil, silver, corn, wheat and soybeans.

Max Chen contributed to this article.

ETFs and ETNs can be considered kin in that they both trade on an exchange all day like a stock, follow an underlying index or product, and are accessible to all investors. Dave Goodboy for Trading Market says that both ETFs and ETNS can serve different investment needs, depending on your portfolio.

Here are some of their differences:

• ETNs are dependent upon the credit of the underlying bank; ETNs are a structured note, created as a senior debt note by a bank. This means if the bank goes under, you’ll have to get in line with the other creditors.
• Any tracking error in the ETN is paid for by the issuer; there’s no risk of tracking error on the part of the investor.
• ETFs can make yearly capital gains (although this is very rare) and income distributions. With ETNs, taxes are deferred until the note is sold or matures. (How ETFs and ETNs are taxed).

Read about more differences between ETFs and ETNs here.

For more stories about ETNs, visit our ETN category.

Barclays Bank PLC has temporarily suspended any further sales from inventory and any more issuance of the ETN iPath Dow Jones AIG Platinum TRSub Index (NYSEArca: PGM), write Kristin Friel and Christine Hudack for Trading Markets.

The suspension of notes may cause deviations in the trading value – more commonly known as tracking error – of the ETN. By limiting the issuance and sales, an imbalance of supply and demand in the secondary market for the notes may occur, and the result would be notes trading at a premium or discount in relation to the baseline value. (How to play precious metals with ETFs and ETNs).

Commodity ETFs have been grappling with potential CFTC regulations for the last several months. (How times are changing for commodity ETFs).

ETNs  are unsecured obligations, not secured debt. The securities have no principal protection; thus, riskier than ordinary unsecured debt securities. (Seven differences between ETFs and ETNs).

For more information on platinum, visit our platinum category.

• iPath Dow Jones AIG Platinum TRSub Index (NYSEArca: PGM): up 49.7% year-to-date

Other platinum ETNs are unaffected, including E-TRACS UBS Short Platinum ETN (NYSEArca: PTD) and E-TRACS UBS Long Platinum (NYSEArca: PTM).

Max Chen contributed to this article.

Copper prices are at their highest levels in six weeks, thanks to both a drooping dollar and concerns about supply of the metal. Anna Stablum for Bloomberg reports that copper prices have doubled this year, mostly because China stepped up its demand as its economy recovered. Investors are now speculating that demand for copper will only increase. (Read more about how copper is used here).

Meanwhile, incidents in Chile and Australia are leading to supply worries. In Chile, the BHP mines are facing a potential walkout/strike as employees are not happy with recent contract offerings. Around 20% of copper mine output is at stake. In Australia, an investigation into an accident at a mine forced the closing of the main hauling shaft.

• iPath Dow Jones AIG Copper TR Sub Index ETN (NYSEArca: JJC): up 95.7% year-to-date

Steel also has experienced rising popularity as the global infrastructure sector recovers and automakers increase demand. Sahil Mahtini and Prasenjit Bhattacharya for The Wall Street Journal report that the Steel Authority of India Ltd., India’s largest steelmaker by local capacity, expects India’s steel consumption to rise 5%-6% in the calendar year 2009, while production is expected to rise 4%-5%.

India’s leading steel companies raised prices of flat products for the second month in a row in September because of demand from automakers and a recovery in global prices.

Meanwhile, the U.S. Commerce Department launched an investigation Wednesday into whether to impose anti-dumping and duties on imports of certain steel pipes from China. Tom Barkley for The Wall Street Journal reports that trade disputes are rising as the global economy moves into recovery mode. Producers are searching for different markets to unload excess inventory.

• Market Vectors Steel (NYSEArca: SLX): up 81.6% year-to-date

For more stories about base metals, visit our base metals category.

Of the ETFs that enable one to gain exposure to this quantitative strategy, the ProShares Credit Suisse 130/30 (NYSEArca: CSM) has drawn the most attention.  Daniel Harrison of Index Universe analyzes this ETF in more detail and concludes that CSM has greater tracking error than the average S&P-weighted ETF, which translates into outsized gains compared to the index in certain markets.

Harrison states that CSM is attractive  because it can’t take a short position in a stock with a weighting of higher than 0.4% in the S&P, which in conjunction with an increasingly stable market environment, may enable advisors to give clients enhanced U.S. equity focus.

The 130/30 strategy in CSM uses financial leverage by shorting poor-performing stocks and buying stocks that are anticipated to have high returns. CSM tracks the Credit Suisse 130/30 Large-Cap Index.  The strategy uses a quantitative analytical system to rank all of the large-cap stocks in the U.S. market, then takes a 130% long position in the high-ranked stocks and a 30% short position in the low ranked stocks.

The ultimate goal of the strategy and the ETF is to generate alpha superior to that of a comparable long-only cap strategy over the long run and generate higher returns.

Another 130/30 fund is the KEYnotes First Trust Enhanced 130/30 Large-Cap ETN (NYSEArca: JFT), an exchange traded note.

The 130/30 strategy is a good, unique one, but it’s important to do your homework and make sure that such a strategy is a good fit for you and your goals.

For more stories on the 130/30 strategy, visit our 130/30 category.

Kevin Grewal contributed to this article.

Although a slight drop in demand has been seen in the markets for cocoa, the commodity has risen to levels seen not seen in months. Worldwide, production is down, although cocoa is still used frequently. We eat it, drink it and use it as gifts, for comfort and for treats.

Julian Murdoch for Hard Assets Investor reports that cocoa futures have gained 20% since July, and despite some volatility, prices are poised to climb further. The world’s top five cocoa producers are Ivory Coast, Ghana, Indonesia, Nigeria and Cameroon. These five countries are responsible for roughly 70% of global cocoa production each year. Rain and disease, however, could interrupt production.

The Ivory Coast has been riddled with black pod disease that has affected crops, as has too much rain. If this continues, it could support the levels at which prices currently reside.

Meanwhile, sugar has been jarring retailers who want to keep consumers spending. For that reason, some retailers haven’t raised prices and have absorbed the extra cost themselves in order to keep shoppers buying candy and other sugar-heavy products, reports Karen Robinson-Jacobs for The Dallas Morning News.

The average price of a bag of sugar has gone up 9.2% from a year ago, and sugar futures are up 70% since April.

• iPath Dow Jones AIG Cocoa ETN (NYSEArca: NIB): up 12.7% year-to-date

• iPath Dow Jones AIG Sugar ETN (NYSEArca: SGG): up 63.8% year-to-date

For more stories about cocoa, visit our cocoa category.

Deutsche Bank is liquidating the PowerShares DB Crude Oil Double Long ETN (DXO) tomorrow. There are two reasons the note is closing down:

• Concerns over the Commodity Futures Trading Commission enacting new position limits on commodity futures this fall
• The fund is actually being liquidated because the New York Mercantile Exchange has started enforcing “accountability limits”

Matt Hougan for Index Universe reports that the NYMEX is finally exercising a power it held for years but until now, it has not been utilized. While the NYMEX did not force the closure of the note, Deutsche Bank could have simply reduced its exposure and looked for other ways to hedge its exposure to the underlying futures contracts.

But since ETNs guarantee perfect tracking of their indexes, they can’t risk even a small amount of error because this error is borne by the fund manager. In ETFs, tracking error costs are taken on by the shareholders.

Swaps aren’t a perfect option, either; although they don’t have tracking error, regulatory crackdowns could send the cost of swaps higher.

Some analysts think that the end result of the rising cost of swaps would be that down the line, ETNs would have to raise expense ratios anywhere from 1%-1.25%. Leveraged exposure would be even higher.

For more stories about commodity ETFs, visit our commodity ETF category.

Small investors gaining exposure to commodity futures through ETFs have drawn the attention of the Commodity Futures Trading Commission’s (CFTC) focus in reining in speculation within oil markets, reports Brian Baskin for The Wall Street Journal. The CFTC has prioritized the end consumers of commodities who benefit from lower prices that would result from limits in speculation.

Individual investors use ETFs to pool money to make one-way bets on rising prices and some now say that this has caused runaway buying, which ignores the bearish signs more well-informed institutional investors usually regard.

Regulatory changes would limit the size of ETFs and result in higher costs for investors because legal and operational costs would have to be spread over fewer shares; thus, regulation would reduce the desirability of this commodity investment tool as shares of closed funds deviate from price moves in the underlying commodity.

A potential alternative would be smaller funds to which investors can turn instead of larger funds inhibited by federal limits. But scaled-back ETFs tend to have higher expense ratios, which would make generating positive returns that much harder for funds to achieve. Or, some investors may choose to give up entirely and turn to picking out major energy companies.

John Hyland, CIO at United States Commodity Funds, talked about this issue yesterday on CNBC.

There’s obviously high demand for these products, and neither the limits nor closures of funds (as in the case of the PowerShares DB Double Long Crude Oil (DXO) exchange traded note (ETN)) will erase the demand. What we could very well see is some funds closing, then reopening in a smaller form with higher expense ratios. These products are so popular that investors may be willing to pay more to own them.

Meanwhile, Deutsche Bank has been quiet about its exact reason for closing DXO. Some reports, says Matt Hougan for Index Universe, have noted that DXO might have been concerned about the size of its positions and any upcoming CFTC limits. But Hougan notes that perhaps the New York Mercantile Exchange might have exercised a “discretionary power” that it has rarely used.

There’s no federal position limit, but the NYMEX actually has two levels of such limits for the majority of commodities, and that includes oil. Firms are limited to 3,000 contracts.

For more information on commodities, visit our commodity category.

Max Chen contributed to this article.