Category Archives: Commodity ETFs

Cotton ETF Investment Options

Posted by Mark on July 7, 2011 Comments Off

Investing in cotton has become one of the most talked about investment options in just the last one to two years. While most investors were still unaware of this specific commodity prior to 2010, interest has soared following the historic price increase for cotton which started in 2009. Correspondingly, ETFs tracking the price of cotton have appeared on the market which provide an opportunity for the individual investor to participate in the cotton market. We will take a look at the basics for this commodity, the investment case and the specific ETF investment options.

Cotton – a Basic Commodity With Many Uses

Cotton Turkmenistan AshgabatCotton is harvested from plants grown in warm, subtropical regions around the globe. It is considered to be a “soft” commodity along with similar agricultural products like sugar, coffee or cocoa. Its main use is within the clothing industry, however, several industrial uses requiring cotton as a raw material also contribute to the overall demand for this commodity.

The three largest producers of cotton worldwide are China, India and the United States, in this order. A curious fact which has a strong influence on the global cotton market is that China, as the largest producer, is an even larger consumer of cotton, turning the country into a net importer. Consequently, India and the United States of the world’s largest cotton exporters.

The Cotton Investing Case

Like most other commodities, cotton has seen a strong price increase in 2009 and 2010. In fact, prices are now at historic heights, unseen in recent decades. While the price increase of most other commodities has slowed down in 2011, cotton has continued its upward trend, leading to an overall price increase of more than 200% compared to 2008. The reason for this price increase is a strong and growing Chinese demand, coupled with ongoing supply constraints due to unfavorable weather conditions in the largest producer nations. Additionally, the amount of land used for growing cotton has constantly decreased for almost three decades now, further limiting the amount of cotton available in global markets. Combined with the fact that cotton is a product with one of the longest “lead times” of all commodities -it takes more than one and a half years from the seed to the finished cotton product- this makes quick increases the global supply unlikely.

The future development of cotton prices therefore depends almost solely on the direction the Chinese demand will take. Naturally, a price rally such as the one experienced by cotton leads to a high volatility and big price swings, making cotton ETFs some of the most volatile funds on the market. Consequently, many investors believe that an at least temporary drop in prices is to be expected in the near future, making short cotton ETFs a much sought-after alternative.

The Cotton ETF List

Several investment options exist for targeting the cotton market. All of them are based on future contracts for trying to replicate the time development of the cotton market price. Three “ETF-like” securities exist which exclusively hold cotton futures in their portfolio, of which two are traded on US stock exchanges. Another ETF with a significant cotton exposure completes the list.

  • The Dow Jones-UBS Cotton Total Return Sub-Index ETN (symbol: BAL) tracks a single cotton future and is the largest exclusively cotton-focused fund on the market with a market capitalization of about $50 million. As an exchange-traded note (ETN) it is not a true ETF, but a debt obligation by the fund issuer.
  • The Pure Beta Cotton ETN (symbol: CTNN) is another ETN which exclusively tracks an index based on cotton futures. At a much lower market capitalization of about $5 million, it has received less attention than the more well-known BAL.
  • The ETFS Cotton (symbol: COTN) issued by ETF securities also tracks cotton futures. It is set up as an exchange-traded commodity (ETC) which like ETNs is in reality a debt obligation by the issuer. The ETFS Cotton fund is traded on the London Stock Exchange in the UK.
  • ETF securities also offers a short cotton ETF to profit from falling prices. Called the ETFS Short Cotton (symbol: SCTO) it is set up in a similar way to the COTN fund as an exchange-traded commodity and is also traded on the London Stock Exchange.
  • Finally, the Dow Jones-UBS Softs Total Return Sub-Index ETN (symbol: JJS) is a soft commodity fund with an exposure to cotton futures of about 1/3 of its portfolio, with sugar and coffee making up the rest.

An Overview of Wheat ETF Investment Options

Posted by Mark on June 29, 2011 Comments Off

General Wheat ETF Information

Among all commodity exchange-traded funds (ETFs), agriculture ETFs have a special place because of the importance that their underlying commodities have in the day-to-day life of every person. This importance and the developments on the markets for agricultural commodities in recent years are a main reason why wheat ETFs have gathered such a strong and growing interest among investors.

WheatOf all the factors influencing the price of wheat, there are three outstanding supply and demand effects that will most likely determine future developments. First, the demand for wheat as a basic food ingredient has been rising for years and will most probably continue to do so, both due to the increase in the world’s population and as well due to the advancing industrialization of the emerging economies and the accompanying rise in living standards. Second, the growing use of bio-fuels also impacts the wheat market. Although wheat itself is currently not used for fuel production, almost all other grains actually are. The associated rise in demand for soybeans and corn indirectly increases the demand for wheat as foodstuff. In contrast to the ever increasing demand, supply of wheat has been heavily constrained due to limitations in arable land as well as recurring supply shortages due to natural catastrophes like Russia’s recent drought.

Investing in Wheat Through ETFs

Investing in wheat is not directly possible with financial instruments listed on U.S. exchanges. The two available options would then be either ETFs tracking agricultural commodity futures with a large exposure to wheat or alternatively ETFs targeting the stocks of companies or countries with a large wheat-related component. Due to the relatively low exposure attainable in the second case, the following wheat ETF list will focus on the first option.

The Wheat ETF List

The following list of wheat-related ETFs contains five funds with a partial exposure to wheat futures listed on U.S. stock exchanges and an additional pure wheat fund listed on the London Stock Exchange.

  • The PowerShares DB Agriculture Fund (DBA) invests in four agricultural commodity futures, with a 25% exposure to wheat
  • The iPath DJ-UBS Grains Total Return Sub-Index ETN (JJG) tracks only three different agricultural commodity futures with an overall 30% exposure to wheat. It is not a true ETF, but an exchange-traded note (ETN)
  • The iPath DJ-UBS Agriculture Total Return Sub-Index ETN (JJA) invests in seven agricultural commodity futures, with a 20% exposure to wheat. It is also an exchange-traded note (ETN)
  • The ELEMENTS MLCX Grains Index Total Return ETN (GRU) is also an exchange-traded note (ETN) with a high wheat exposure of almost 50%
  • The ELEMENTS Rogers International Commodity Agriculture ETN (RJA) is a more conservative ETN with a diversified portfolio of 20 agricultural commodities, offering a 20% exposure to wheat
  • On the London Stock Exchange, the Wheat Exchange Traded Commodity (ETC) is a special financial instrument traded in a way similar to ETFs under the symbol WEAT, which is actually a debt note issued by the fund managing firm. It tracks the DJ-UBS Wheat Sub-Index and offers a true 100% exposure to wheat. Additionally, leveraged and short ETCs are available under the wheat ETF symbols LWEA and SWEA, respectively.

A Uranium ETF Introduction

Posted by Mark on June 20, 2011 Comments Off

Uranium-oriented exchange-traded funds (ETFs) are certainly exotic financial instruments which even many experienced investors have never once considered. If you are one of them, and you are wondering whether a uranium ETF should have a place in your portfolio, please read on: we will first give you a quick introduction to uranium itself, followed by the main arguments concerning an investment in uranium and finally a quick look at the two available uranium ETFs on the market.

Uranium – a Rare Commodity

Nuclear Power PlantUranium is a radioactive metal which is mined mainly for its use as a fuel in nuclear power plants worldwide. While there are other special uses for this material -both civilian and military-, power generation is the only use which drives the production capacities and thus the price of uranium.
The largest producer is Kazakhstan at a little over one quarter of worldwide supply, followed by Canada, Australia and Namibia. Uranium is not traded on an exchange like most other commodities, but is rather sold and bought in private deals between producers and users. Consequently, no future-based or even physical uranium ETFs exist, and both relevant ETFs mentioned below are stock-based.

Investing In Uranium

Predicting the future price of a commodity with any accuracy is always difficult at best. With uranium, the turbulent history of nuclear power generation adds another level of uncertainty. However, it seems unlikely that nuclear power will disappear anytime soon. For example, Japan remains strongly dependent on nuclear energy even after the 2011 disaster, while Russia, China and India are aggressively expanding their nuclear power generation capacities. With many reactors currently under construction, it is unlikely that demand will decrease significantly in the near-term.

The supply of uranium has remained flat over recent years, as not many exploration projects have been carried out until recently. With less than 15 uranium suppliers worldwide, large near-term increases in production capacity are unlikely.

On the other hand, power plants need uranium for operation, and since fuel costs make up a very small part of their overall energy production costs, the price of uranium is not their major concern, as long as the supply can be guaranteed.

Specific Uranium ETFs

Two ETFs with exposure to uranium and the nuclear industry are currently listed on U.S. exchanges and make up the whole uranium ETF list:

  • The Global X Uranium ETF issued by Global X (Symbol: URA) tracks an index composed of 24 companies worldwide which are active in mining, exploration and processing of uranium as well as in manufacturing supplies for this industry. More than half of these companies are based in Canada, with the rest dominated by Australian and U.S. firms, making this a true global uranium ETF. Started in November 2010, it is the only ETF on the market with a pure focus on uranium.
  • The Market Vectors Uranium+Nuclear Energy ETF issued by Van Eck Associates (Symbol: NLR) tracks the DAXglobal Nuclear Energy Index. Its holdings contain 23 securities of companies worldwide with their focus on the nuclear energy industry. While it is thus not a pure uranium stocks ETF, its exposure is broader than URA’s. The regional distribution of these companies is very evenly allocated, with the U.S. and Canada making up over 50%, Japan 25% and Europe and Australia the rest.