Is Sugar The Best Commodity ETF Right Now?

2015 has been a bad year for both soft and hard commodities. Notably, S&P GSCI Total Return – the benchmark for commodity market performance – nosedived about 19.3% in the third quarter, representing the fifth worst quarter and the third worst third quarter since 1970. With this, the index is on the verge of recording the sixth worst year after 2008 (read: Agricultural Commodities at Multi-Year Lows: Avoid 3 ETFs).

The blame is largely heaped on the stronger dollar, global growth worries, plunging oil prices and weakening demand that have dampened the appeal for commodities. Economic slowdown in China is a major setback for the commodities market as the world’s second-largest economy is also the world’s largest buyer of raw materials.
 
However, there seems to be a torch bearer in this commodity market blackout. It is sugar as its price has recovered as much as 30% since touching its seven-year nadir on August 24. Last week, sugar was the only commodity (except steel) that registered a double-digit rise of around 10%.
 
The upsurge was mainly driven by the appreciation of the Brazilian real against the U.S. dollar and Brazil’s decision to hike fuel prices. Sugar is greenback-priced in Brazil, the largest producer of the agricultural commodity in the world. Therefore, a weaker dollar discourages sugar exports from the country, lifting up its prices in the world market.
 
Shortage of production is another issue that is playing on the bullish trend in sugar prices. As per International Sugar Organization, sugar cane processed this season in Brazil declined 2.1% to 412,624 million tons while sugar output in the country is down 11% from the prior year as mills are converting more cane to ethanol in response to a possible hike in gasoline prices.
 
India, the world’s second largest sugar producer, is also expected to experience a 5% fall in sugar output to 28.3 million tons in 2015, as per Indian Sugar Mills Association, thanks to the El Nino weather condition that is causing insufficient rainfall in the region.
 
According to a note by Morgan Stanley, sugar consumption is expected to exceed demand for the first time in six years. The firm expects consumption to outdo demand by 3.7 million metric tons in the marketing year that began on October 1.
 
Riding on the bullish trend in sugar prices, ETFs that are exposed to this soft commodity have been experiencing handsome gains (some double digits as well) over the past one month. Below we highlight three of those ETFs that investors should definitely consider in this otherwise bearish commodity market (see all Agricultural ETFs here).
 
iPath Bloomberg Sugar SubTR ETN (SGG – ETF report)
 
SGG tracks the Dow Jones-UBS Sugar Subindex Total Return Index, which provides the returns that are in an investment in the futures contracts on the commodity of sugar. The note has garnered nearly $56 million in assets and trades in a daily volume of 48,000 shares on average. It charges 75 bps in annual fees. The note was up 15.2% in the past one month and has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Best and Worst Performing ETFs of September).
 
Teucrium Sugar ETF (CANE – ETF report)
 
This ETF tracks the Sugar Futures index, which reflects the daily changes of a weighted average of the closing prices for three futures contracts for sugar that are traded on ICE Futures US. The fund is nearly overlooked as it has gathered nearly $4 million in assets and trades in a paltry volume of around 5,000 shares. However, the ETF is expensive charging a hefty 176 bps in fees from investors per year. It was up 9.8% over the last one month and carries a Zacks ETF Rank #3 with a High risk outlook.
 
iPath Pure Beta Sugar ETN (SGAR – ETF report)
 
This is another sugar ETN by iPath and follows the Barclays Capital Sugar Pure Beta TR Index. The index consists of a single futures contract but it has a unique roll structure which selects contracts using the Pure Beta Series 2 Methodology. SGAR is also neglected with only $1.4 million in AUM and is thinly traded with average volume of nearly 2,000 shares. The note charges 75 bps in annual fees and was up 12.5% in the past one month. It also carries a Zacks ETF Rank #3 with a High risk outlook (read: 2 Winning Commodity ETFs for the Worst Q3).

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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