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Buy These Top Ranked Cocoa ETFs as Ebola Virus Epidemic Spreads

Zacks Equity Research

Thanks to the rising global demand for chocolates and shortage of supply in major producing regions – Ivory Coast and Ghana – due to political issues and unfavorable weather conditions, prices of cocoa have been riding high since the start of the year.
 
There seems to be no holding back cocoa prices which saw fresh momentum recently led by fears of the deadly Ebola virus spreading across West Africa. This is expected to hurt exports from the two West African countries, which together account for a huge 60% of the world’s cocoa crop.
 
As per recent forecasts, Ebola is expected to spread faster in West Africa than previously estimated, sending cocoa prices a to 3-1/2 year high (read: Will Cocoa ETFs Taste Bitter or Sweet Ahead?).              
 
Though there have not been any confirmed case of the disease in either country, Ivory Coast shares its border with Liberia and Guinea, two of the countries hardest hit by Ebola.
 
Even in the best case scenario in which the disease doesn’t spread to Ivory Coast, the Ebola epidemic is expected to have a widespread impact in the cocoa market. This is because a lot of cocoa pickers are migrant workers from the affected countries and their absence is expected to take a toll on the shipment of the crop.
 
In the worst case, any slight spread of the disease is expected to halt exports from Ivory Coast and send cocoa prices to as much as $4,000 a ton from the current $3,300 a ton, says Hector Galvan, senior market strategist at RJO Futures in Chicago. Edward George, head of group research for the African banking group, Ecobank, says that prices might even double from these levels.
 
While the Ebola virus has made the picture gloomy on the supply front, rising global demand for chocolates is likely to support the upward movement in prices. Growing population, improving living standards and increasing consumer awareness about the health benefits of cocoa are some of the factors driving demand for this soft commodity, as per a report entitled "Cocoa & Chocolate Market - Global Trends & Forecasts to 2019."
 
In fact, the report says that increasing demand from developing countries such as India and China is likely to provide a significant boost to the cocoa & chocolate market in the upcoming years (read: India ETFs: Best of the BRICs Now?).
 
How to Play?
 
Given the recent supply concerns in the cocoa market and the surging demand scenario, cocoa prices are likely to see a further uptrend, should the deadly virus spread further. In that case, cocoa exchange traded products might be a lucrative destination for investors seeking to play the move higher in this space.
 
For investors who believe so, we have highlighted below some of the details about two products targeting this space (read: Introductory Guide to Soft Commodity ETFs).
 
iPath Dow Jones-UBS Cocoa Subindex Total Return ETN (NIB)
 
The ETN tracks the Dow Jones-UBS Cocoa Subindex Total Return to provide exposure to cocoa prices. The index delivers returns through an unleveraged investment in futures contracts on cocoa. NIB currently consists of one futures contract.
 
The product manages an asset base of $23.4 million and charges 75 basis points as fees. However, the product trades in low volumes of roughly 14,000 shares which might result in additional cost in the form of a wide bid/ask spread.
 
NIB has returned 8.35% in the past one week and 20.7% this year. It currently carries a Zacks ETF Rank #2 or Buy rating (read: all the agricultural ETFs here).
 
iPath Pure Beta Cocoa ETN (CHOC)
 
CHOC is less popular and illiquid, with an AUM of $10.2 million and average trading volume of less than 3,000 shares.
 
CHOC tracks the Barclays Cocoa Pure Beta Total Return Index to provide an unleveraged investment in futures contracts in the cocoa markets. However, unlike many commodity indexes, this one can roll into one of a number of futures contracts with varying expiration dates, as selected by using the Barclays Pure Beta Series 2 Methodology. 
 
The fund also charges 75 basis points as fees and has returned 7.62% in the past one week, while returning 19.7% in the year-to-date frame. CHOC currently has a Zacks ETF Rank #2 or Buy rating.
 
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Read the analyst report on NIB

Read the analyst report on CHOC


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