Be Careful With This Valentine's ETF Trade

Valentine’s Day is almost here and that has plenty of folks thinking about chocolate, but just because chocolate is popular at this time of year does not mean investors should exploit that theme with exchange traded products.

The iPath Bloomberg Cocoa TR Sub-Index ETN (NYSEArca: NIB) and the iPath Pure Beta Cocoa ETN (NYSEArca: CHOC) are down an average of 12.3% year-to-date. The ETNs have flailed despite supply concerns out of west Africa where three-quarters of the world’s cocoa is produced, and the potentially negative impact of the El Niño weather pattern, which typically brings dry conditions across the region, reports Emiko Terazono for the Financial Times.

Looking ahead, market analysts are projecting a cocoa supply shortfall of 100,000 tons for this cocoa season of 2015 through 2016, with some expecting the supply deficit to fall by as much as 250,000 tons.

Edward George, head of group research at Ecobank, believes production from the Ivory Coast, the world’s largest producer, could decline 100,000 tons to 1.65 million tons while neighboring Ghana, the second-largest producer, could see this season’s crop fall to about 720,000 tons from the 900,000 initially pledged due to unseasonal rains and extreme dryness.

There are other issuers to consider with cocoa ETNs.

“Both ETFs have expense ratios of 0.75 percent annually, or $7.50 for every $1,000 invested, significantly more expensive than most other ETFs—the average ETF expense ratio is 0.43 percent,” according to Consumer Reports.