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3 Commodity ETFs to Watch in 2014

2013 wasn’t particularly good for commodity investing as the dollar gained more strength compared to several currencies, and stock markets kept hitting new highs day in, day out. Despite this, some agricultural-based products turned around as the year progressed, probably on supply crunch for some soft commodities and global recovery which led to enhanced consumption.

The performance of the broad agricultural commodity fund PowerShares DB Agriculture Fund (DBA) displays this gradual improvement. The product lost 14% so far this year while it shed just 3.5% in last three months.

Amid such a backdrop, it would be prudent to pick some agri-based exchange traded products which could be good bets in 2014. Highlighted below are three choices that have the potential to bounce back in the coming year.

iPath Pure Beta Cocoa ETN (CHOC)

Cocoa funds have been the star performers in the agricultural space with CHOC and iPath Dow Jones-UBS Cocoa Subindex Total Return ETN (NIB) returning roughly 5% in the last three-month period.

Growing worldwide demand along with a supply crunch is pushing up cocoa prices and subsequently the funds covering this soft commodity. Since cocoa is the basis of chocolate, demand for the product is rising rapidly in the holiday season.

Further, China is also accounting for the extra demand in the sector with twofold increase in sales over the past 10 years. The growing purchasing power of the middle-income population is driving Chinese consumption ahead of European use (read: China ETFs Jump on Government Reform Afterglow).

Moreover, political unrest and inclement weather in major producing regions – Ivory Coast and Ghana – are crippling cocoa supplies thus resulting in failure to meet global demand. As per the International Cocoa Organization (ICCO) the global cocoa production will close 2013 with a significant deficit as opposed to last two years of surplus while grindings (demand) are slated to move higher in the next two seasons.

Hence, According to Rabobank – a global leader in agri-financing – cocoa prices will likely hit its highs in 2014 thanks to deficit concerns. This uptrend in cocoa prices make cocoa exchange traded products a lucrative destination for investors (read: Cocoa ETFs: The Safe Haven In Agricultural Commodities?).

CHOC in Focus

This note seeks to match the performance of the Barclays Cocoa Pure Beta Total Return Index. Unlike many commodity indexes, this one can roll into one of a number of futures contracts with varying expiration dates, as selected using the Barclays Pure Beta Series 2 Methodology (read all the agricultural ETFs here).

This approach might result in less contango. This can be an important factor, as month-to-month shifts in contracts can eat away returns during an unfavorable market situation. The product charges 75 bps in fees.

The ETN gained 12.6% in 2013 – the highest among any other agro-based products. The product currently carries a Zacks ETF Rank #1 (Strong Buy).

Teucrium Sugar Fund (CANE)

Sugar is another product which should see a spike in prices aided by flat demand and declining production as per the Rabobank. Millers in Brazil, the world’s biggest sugar producer will produce more ethanol – which will be made of sugarcane – next year, thus keeping a lid on sugar supplies. More Ethanol production is necessary in Brazil to combat rising gasoline prices and use ethanol as an alternative fuel.

This sweet commodity had fallen out of favor in 2013 thanks to a record harvest from Brazil and a surplus in other key countries, but it might be an intriguing option for investors seeking to cash in on the favorable demand-supply dynamics in 2014. CANE better serves this purpose in the space, and we have highlighted some of the key stats on this fund below:

CANE in Focus

CANE provides investors direct exposure to sugar without the need for a futures account. The product seeks to alleviate the impact of contango and backwardation. The ETF uses three futures contracts for sugar, all of which are traded on the ICE Futures exchange.

The three contracts include the second-to-expire contract, weighted 35%, the third-to-expire contract, weighted 30%, and the contract expiring in the March following the expiration month of the third-to-expire contract weighted 35%.

The fund has amassed just $2.4 million in its asset base and is less liquid with a very small daily trading volume. The product is the high cost choice in the space as it charges a fee of 162 bps per year. Further, a wide bid/ask spread increases the cost of investment to those looking for a quick trade.

Though CANE was down 6.49% in the last three-month period, investors should note that the rate of loss was quite lower than the gigantic losses it incurred in early 2013. The fund currently holds a Zacks ETF Rank #2 (Buy).

Pure Beta Livestock ETN (LSTK)

This field of investing has been affected heavily by a nationwide drought that sent cattle to market sooner than normal in 2012 resulting in a short-term surge in supplies. The space saw a price rise in 2013 due to higher corn prices and low production.

Going into 2014, though the production outlook is improving, it is yet to hit the pre-crisis level thus still having something in store for investors. USDA raised cattle prices for 2014 in its December report from November as demand for fed cattle remains strong. Strong demand and still-tight supply will likely lead the space.

LSTK in Focus

The underlying index of this ETN gives exposure in two futures contracts on livestock commodities. It invests about 62.4% in live cattle and 37.6% in lean hogs. It charges an expense ratio of 75 bps a year. The product was up 2.06% in the last three months. LSTK currently carries a Zacks ETF Rank #3 (Hold).

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Read the analyst report on NIB

Read the analyst report on CHOC

Read the analyst report on DBA

Read the analyst report on CANE

Read the analyst report on LSTK

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