Although many might think of coffee as their breakfast time drink of choice (or in most cases, breakfast time necessity), its popularity as a lucrative financial instrument has surged in recent years. While coffee’s uses are quite limited outside of the consumption scope, the massive demand for this product has allowed it to become one of the most active futures contracts on the market.
Since the supply of coffee is largely dominated by emerging market countries, such as Brazil and Vietnam, its inherent volatility and potentially lucrative returns make trading the commodity highly appealing to investors and traders alike. And thanks to the development of the exchange-traded fund industry, investors now have several ways to gain access to this popular soft commodity. Below, we outline the two most popular coffee ETFs and how they will fit your investment objectives.
Dow Jones-UBS Coffee ETN (JO)
Quick Stats (5/19/2015)
- Total Assets: $90.4 million
- Three Month Average Volume: 129,387
- Expense Ratio: 0.75%
- In Depth: JO Analyst Report and ETFdb Realtime Rating
In 2008, Barclays iPath introduced the first-ever coffee ETN to the markets. Since then, JO has been gaining popularity in the investment world, catching attention from investors and traders alike. The cleverly named fund tracks an index that consists of only one futures contract on coffee. JO’s simplicity and effectiveness have allowed the fund to amass over $90 million in total assets under management and maintain a relatively healthy trading volume of about 130,000 shares on avergae during a three month period. It is important to note, however, that JO is structured as an exchange-traded note, meaning investors will be exposed to the potential credit risk of the issuing institution [see also Jim Rogers: The Agriculture Industry is Doomed].
JO is right for you if: You are an active trader seeking to either speculate on coffee’s movements or quickly execute positions in the commodity.
Pure Beta Coffee ETN (CAFE)
Quick Stats (5/19/2015)
- Total Assets: $5.7 million
- Three Month Average Volume: 10,922
- Expense Ratio: 0.75%
- In Depth: CAFE Analyst Report and ETFdb Realtime Rating
CAFE is the only other coffee exchange-traded product available on the market, offering investors exposure to coffee prices through the futures market, but with a slight twist. Unlike JO, which rolls its holdings on a monthly basis, CAFE does not roll exposure on a predetermined schedule; the roll timing is based on a proprietary “pure beta” methodology designed to reduce the impact of contango or backwardation on returns. This is perhaps the fund’s most alluring feature, considering how both of these futures-trading nuances can have a devastating impact on bottom-line returns.
CAFE is right for you if: You are an investor looking to achieve coffee futures exposure, but want a methodology that helps avoid the adverse effects of contango.
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Disclosure: No positions at time of writing.
