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 world is facing sugar shortage so alarming that the Agriculture Department has been asked to ease quotas on imports. Since the price of sugar has gone up substantially, manufacturers are warning that run-up could impact grocery shelves, reports Jerry Hrisch for The LA Times.

Analysts say those fears are overblown and that it’s just a tactic on the part of manufacturers to get the United States to take down trading barriers.

On world markets, sugar prices are up 72% for the last six months. Among the pressures on the supply of sugar include bad weather in the sugar producing region of India, the Brazilian sugar cane diversion to make ethanol and the rise of the global sweet tooth.

If the prices are reflected on grocery shelves, it may not be for awhile. Many large food manufacturers likely bought sugar futures after prices began to climb.

• iPath Dow Jones AIG Sugar ETN (SGG): up 63.4% year-to-date

For more stories about commodities, visit our sugar category.

The Labor Department said that companies handed out 247,000 pink slips in July, resulting in an overall drop in the unemployment rate from 9.5% to 9.4%.  The report also showed that workers were getting more hours after falling to a record low in June. Paychecks also grew.

American International Group Inc. (AIG) reported its first quarterly profit since 2007.  The troubled insurer reported profits of $1.82 billion and is aiming to spin off some of its assets to begin repaying its loans from the federal government.  The profits were primarily driven by the stabilizing value of some its riskier investments, while its insurance results remain “challenged,” states Chairman and CEO Edward M. Liddy.

Fannie Mae posted a second quarter loss and is expected to ask for an additional $10.7 billion from the Treasury Department to continue operating.  Sister company Freddie Mac is expected to release earnings later today.  Together, with Fannie’s new request, the two companies will have gobbled up nearly $96 billion.

In the commodities world, white sugar rose to a 28-year high on concerns that adverse weather in sugar-producing parts of the world, such as India, will hinder supply.  Prices have surged to their highest level for a most-active contract since April 1981, reports M. Shankar of Bloomberg.  The news sent the iPath DJ AIG Sugar TR Sub-Idx ETN (SGG) up 3.5% in morning trading.

Overall all three major U.S. indexes reaped the benefits of a better-than-expected jobs report.  The Dow Jones Industrial Average and the Nasdaq each added 1.6% while the S&P 500 gained 1.7%.

For more stories on sugar, visit our sugar category.

Kevin Grewal contributed to this article.

Some commodities have performed a bit better than others in recent months.  Now that inflation fears have been put on the back burner by the Federal Reserve, will the commodities that outperformed this year resume their uptrends anytime soon, or simply hold steady for the time being? No one knows, so watch the trend lines for signals.

If the prices continue to decline from this point, have an exit strategy in place to protect yourself. We watch for positions to decline 8% off their recent high or below their 200-day moving average.

TraderMark has identified the ten hottest commodities for the year and their corresponding ETFs (although in some cases, be aware that there’s more than one way to play these commodities). Be sure to understand which commodities hold what – some hold physical commodities, some hold futures and others hold the stock of companies involved in their production.

• Unleaded Gas, represented by the United States Gasoline Fund (UGA), up 68.3% year-to-date.
• Copper, which can be accessed through the PowerShares DB Base Metals Fund (DBB), 32.3% year-to-date
• Crude Oil, represented by the PowerShares Dynamic Oil Services (PXJ), up 23.2% year-to-date
• Orange Juice, which can be exposed through the Market Vectors Agribusiness (MOO), up 24.5% year-to-date
• Silver, which is represented by the iShares Silver Trust (SLV), up 23.3% year-to-date
• Sugar, which is seen in the  iPath DJ AIG Sugar (SGG) up 32% year-to-date
• Coffee which can be accessed through the iPath DJ AIG Coffee (JO), up 6.4% year-to-date
• Soybeans, which comprises 25% of the assets of the  PowerShares DB Agriculture (DBA) is down 0.4% year-to-date; exposure to both corn and wheat, two of the nation’s largest commodities can be accessed through DBA as well
• Heating Oil, which can be exposed through the United States Heating Oil Fund (UHN), up 22.2% year-to-date
• Nickel, which is represented through the iPath DJ AIG Nikel (JJN) up 31.5% year-to-date.

For more stories on commodities, visit our commodities category.

Kevin Grewal contributed to this article.

Then we’ll start looking forward to what we hope will be a year full of less pain and more investment opportunities.

1) Global markets will no longer be in sync with the U.S. market, and ETFs are the way to take advantage of global growth.

While domestic markets weren’t as bad as global ones, let’s face it: no one was safe in this downturn. Most global markets were hit harder than the United States was. As of Dec. 9, the S&P 500 was down 39.5%. European markets were down about 47.9%; Asia was down about 46.9% and Latin America was off by 50.8%.

The events of this year show that we’re all linked and interdependent. As the United States slowed down and stopped spending, it created a ripple effect that touched every market in the world – imports slowed, exports dropped off and everyone felt the pain.

2) Actively managed ETFs fail to generate excitement.

Yes. The first actively managed ETF launched in March, but the fund couldn’t have had a worse name attached to it: Bear Stearns. By September, the fund announced it was closing down.

But for other actively managed ETFs that were launched by PowerShares this year, the jury is still out. These funds are in a challenging climate, and while they’re beating or are even with the broader market, most of them are down, so the assets aren’t pouring in at the moment:

• PowerShares Active Low Duration Fund (PLK): Invests in a portfolio of U.S. government, corporate and agency debt securities. It seeks to outperform the Lehman Brothers 1-3 Year U.S. Treasury Index. The unitary fee will be 0.29%. In the last three months, it’s up 2.8% and has $6 million in assets.
• PowerShares Active Mega Cap Fund (PMA): Invests primarily in the equity securities of mega-caps. It seeks to outperform the Russell Top 200 Index. The unitary fee will be 0.75%. In the last three months, it’s down 21.5% and has $2 million in assets.
• PowerShares Active AlphaQ Fund (PQY): Invests in a portfolio of about 50 securities listed on the Nasdaq Global Market. It seeks to outperform the Nasdaq 100 Index, and the unitary fee will be 0.75%. PQY is down 31% year-to-date and has $4 million in assets.
• PowerShares Active Alpha Multi-Cap Fund (PQZ): Invests in about 50 securities selected according to a methodology developed by AER advisors. It seeks to outperform the S&P 500. Its unitary fee will be 0.75%. It’s down 39% year-to-date and has $6 million in assets.

The PowerShares Active US Real Estate Fund (PSR) launched in November. Look for even more launches in the active space in 2009.

3) ETFs hit $1 trillion in assets.

Nope, not even close. ETFs enjoyed positive asset flow this year, but 2008 is not the year the industry is going to hit the $1 trillion mark. As of November 2008, total assets for U.S.-listed ETFs and exchange traded notes (ETNs) stood at $487.6 billion, a 16.8% decline from November 2007. But ETFs are still experiencing strong inflows: $26.4 billion for November and more than $70 billion year-to-date. Mutual funds have  had more than $400 billion in outflows year-to-date coupled with more than $1 trillion of market depreciation.

ETFs also represent 43% of all equities trading volume in the United States. Launches continued this year as well: there were a total of 843 ETFs and ETNs in existence as of November’s end, compared with 650 a year ago.

4) More ETFs will appear on global exchanges.

True. ETFs managed to continue a popularity surge that left few areas of the world untouched. Some established participants in the ETF marketplace continued to see new offerings, including Europe. In August, the London Stock Exchange saw its biggest launch of new ETFs ever with 19 new funds. Barclays expanded into new markets, such as Brazil, with the launch of three new funds there earlier this month. The Middle East was also a hot spot for new ETFs, with Dubai and Abu Dhabi launching ETFs and other exchange traded products of their own. Ireland also got an index, and it’s soon to be followed by an ETF.

5) Bigger players will enter the market.

True. Most notably, PIMCO, the world’s largest bond fund manager, is gearing up to launch a line of bond ETFs. PIMCO filed for a proposed 1-3 Year Treasury Index Fund, which will trade on the NYSE Arca exchange and follow a Merrill Lynch benchmark. If PIMCO’s example sticks, we could see even more mutual fund providers getting into the ETF space.

6) Commodity ETFs will continue their expansion and gain even more popularity.

True. Let 2008 go down in history as one of the bigger years for commodities. Not only did prices shoot up to historic highs in July, but most of them lost big in the second half of the year. Some, such as oil and gas, lost 70% from their records. New commodity ETFs and ETNs were launched at a blistering pace nearly all year, and they covered strategies and commodities of all types: long, short, leveraged, gold, platinum and other precious metals, coffee, sugar, cotton, livestock, oil and gasoline.

7) Fixed-income assets will grow.

Definitely, but most of that money went to Treasuries. As we write, we’re in the midst of a rush to Treasuries that has driven yields down to lows not seen in 50 years. In fact, government debt is so popular right now that an auction of $30 billion in short-term securities at a 0% yield created so much demand, the government could have sold four times as much. This year has been all about investors looking for security. As of November 2008, there were 52 fixed-income ETFs available, compared with 49 at the start of the year.

8 ) U.S. investors will begin realizing that they can look abroad for their investments.

Not so much. Not that looking abroad was necessarily a bad thing, but this year, investors saw that there were few places for them to go outside of the standard safe havens. Every sector and global region has been hit in this crisis – even traditionally defensive sectors were left reeling.

9) Individual investors will start asking their financial advisors why ETFs aren’t part of their portfolios.

True. Investors are fed up, and it’s showing. We’re seeing a louder call for ETFs in 401(k) plans, as well as a push for better fee disclosure. While the industry is not quite there yet, it’s better off than it was a year ago.

Perhaps one bright spot in this financial crisis is how aware it has made individual investors about their portfolios, and we think that the days of convoluted and high fees and a lack of transparency are over. People are paying attention now. Investors are not only realizing that ETFs are the perfect product to remedy these issues, but they’re going to start demanding them more than ever when the market begins to turn around.

10) An ETF of ETFs will finally hit the U.S. market.

Yes. PowerShares led the way in May of this year, with a line of ETFs of ETFs.

• PowerShares Autonomic Growth NFA Global Asset Portfolio (PTO): The most growth-oriented of the three funds, with 90% equity and 10% fixed income. $9 million assets.
• PowerShares Autonomic Balanced Growth NFA Global Asset Portfolio (PAO): Holds 75% equity and 25% fixed income. $8 million assets.
• PowerShares Autonomic Balanced NFA Global Asset Portfolio (PCA): Holds 60% equity and 40% fixed income. $7 million assets.

Relatively speaking, today sugar is cheap.  In October 1980, London refined sugar (No.5), was trading at an average price of 42.30 cents per pound as compared to 15.07 cents per pound in October 2008.

The USDA reports that sugar # 11 traded on the New York Board of Trade, the U.S. equivalent to London refined sugar, has averaged 10.01 cents a pound over the last 10 years, while London #5 has averaged 12.30 cents per pound, reports Julian Murdoch of Hard Asset Investors.  When one includes inflation, it just adds gravy to the pot.

Murdoch also reports that sugar, which has gained 19%, has outperformed the S&P 500, which has lost about 39%, mainly because of supply and demand.  Consumption has increased because of a demand for refined foodstuffs from the surge in per-capita income of Asian economies and a transition away from high-fructose corn syrup to actual sugar.

Until recently, supply had kept pace with demand. However, two top sugar producing countries, Brazil and India, have been hit by the global credit crisis and a decline in production, respectively, resulting in estimates for production to drop by 3.8%.

Falling crude oil prices may curtail this supply shock, in that a huge chunk of the sugar produced in Brazil is used to fuel the production in ethanol and may now be used to chip away at the decrease in production.

Since its inception in July, iPath DJ AIG Sugar TR Sub-Idx ETN (SGG) is down 25.5%.

Let’s face it, everyone has to eat, regardless of economic conditions.  With population growths in emerging market countries, extended life expectancies and an overall desire for more food by consumers, the demand for food will continue to increase, which in turn, will cause an increase in demand for staple commodities such as corn, soybeans, wheat and sugar.  This domino effect could lead to an increase in value for related ETFs, such as agricultural ETFs.

Michael Kahn of Barrons states that all four of these staple commodities have lost a significant amount of value this year. This decline in value, along with other factors, has Kahn making a bullish case.

Does this suggest that agricultural ETFs are bullish? Only time can really answer this question. After all, one must keep in mind that although this demand for commodities will most likely continue to increase, there are other factors, a rising value in the dollar, just to name one, that could curtail this demand effect on the price of commodities.

Our strategy is to use the moving average to determine when we should be in. Right now, this fund is below both its 50-day and 200-day moving averages. When it crosses those points, it might be worth considering whether it’s right for your portfolio.

PowerShares DB Agriculture (DBA) is an index of corn, soybeans, sugar and wheat futures. It’s down 16.8% year-to-date.

Nigeria is the world’s fourth-largest producer of the key chocolate ingredient, reports Dulue Mbachu for Bloomberg. The stepped-up production was as a result of government incentives. Production could have actually been higher, since the official tally doesn’t account for cocoa smuggled out of the country.

The top three cocoa producers are Ivory Coast, Ghana and Indonesia, according to the International Cocoa Organization. Cocoa prices have been on an overall uptrend in the last year, up 37% in July from a year ago. Prices are now at their highest levels in two months.

Sugar, in particular, is benefiting from a renewed interest in soft commodities. After Tuesday’s gain, sugar continued the upswing and went to a 21-month high, reports Nigel Hunt for Reuters. Arabica futures are turning higher, too, leading to a run-up in coffee prices.

Is anybody else hungry?

• iPath DJ AIG Coffee TR Sub-Index ETN (JO), up 1.5% since July 8 inception
• iPath DJ AIG Cocoa TR Sub-Index (NIB), down 4.5% since July 8 inception
• PowerShares DB Agriculture (DBA), up 11.3% year-to-date (holds 19.1% in sugar futures)
• UBS E-TRACS CMCI Food (FUD), up 5.6% since April 4 inception (holds sugar, coffee and cocoa)