As has been widely documented, 2015 has been a dismal year for commodities exchange traded products as investors have dumped funds with exposure to gold, silver, agriculture and energy commodities.
Gold futures and physically-backed ETFs have been pressure this year amid speculation the Federal Reserve is preparing to raise interest rates, which has pushed the dollar higher. Higher interest rates would diminish gold’s attractiveness since the precious metal does not pay interest like fixed-income assets. Investors have pulled $2.14 billion from GLD, the world’s largest gold ETF, this year. [Doubters in Gold Rally]
Heading into 2016 it would appear that opportunities with soft commodities ETFs and exchange traded notes (ETNs) are a few and far between, but selective investors could find some rewards with a surprising candidate: The iPath Dow Jones-UBS Cotton Subindex Total Return ETN (NYSEArca: BAL).
BAL has proven plenty resilient in 2015, soaring 3.3% as other commodities ETFs have tumbled and that is in the face of record cotton harvests and a rising dollar. Harvests are expected to exceed demand for the fifth straight year as subdued global growth weighs on consumption. The International Monetary Fund downwardly revised global growth to 3.4% from 3.7% in April, the Wall Street Journal reports. Cotton prices are sensitive to economic data since demand is tied to consumer spending on basic items like apparel, bed sheets and towels.
Moreover, cotton production in India, the world’s second-largest grower, is expected to hit an all-time high after monsoon rain delays caused farmers to switch out soybean and peanut crops, Bloomberg reports. However, China, the world’s top producer and consumer of cotton, may sop up some of the extra supply between September and December, with spinners requiring fresh domestic supplies or imports due to low inventories and lack of high-quality cotton, Reuters reports.
“The total consumption of cotton has risen every year for the last five years, despite the loss of market share. The current purchasing volume from mills indicates a consistent to cautious outlook for demand going into 2016. Current ICE cotton futures for December 2016 have ranged from 62-66 cents this year. Currently ICE futures all the way until October of 2018 are trading between 65.43 and 64.34 with the 2018 date representing the lowest in the range. In other words, investors aren’t betting on cotton spiking any time soon,” according to a Seeking Alpha analysis of BAL and cotton futures.
iPath Dow Jones-UBS Cotton Subindex Total Return ETN
