Sugar Prices Going Up: What ETFs and ETNs Should You Choose?

What's the outlook for the iPath Dow Jones-UBS Sugar Subindex Total Return ETN, the iPath Pure Beta Sugar ETN, and the Teucrium Sugar ETF?

Mar 14, 2014 at 10:34AM

Global sugar supply is starting to feel pressure coming from Brazil, the biggest producer and exporter of the sweet commodity. Unfortunately, the country had the driest summer since 1972, and this is affecting its sugarcane season. According to The Wall Street Journal, the extreme drought could reduce the 2014 harvest by 36 to 40 million metric tons, leading demand to outpace supply.

Global supplies are still meeting demand, but global sugar consumption is likely to grow about 2.3% this year, inevitably causing a rise in prices. In fact, prices for sugar No. 11 futures have risen from less than $0.15 a pound to about $0.18 per pound in five weeks, and they could continue to grow in the weeks ahead if shortage estimations persist.

How to follow sugar prices
If you do not trade futures and would like to increase your exposure to sugar, the easiest way would be to invest in exchange-traded notes and exchange-traded funds that track sugar as an underlying asset. Currently, there are two ETNs and one ETF with similar but not identical characteristics in the market.

One is iPath Dow Jones-UBS Sugar Subindex Total Return ETN (NYSEMKT:SGG), which makes it exceptionally easy to follow sugar price action. This note is up 2.6% year to date, doing way better than the SPDR S&P 500 (NYSEMKT:SPY) ETF, which has gained less than half a percent so far in 2014. This ETN charges an annual fee of 0.75%.

Another note to consider is the iPath Pure Beta Sugar (NYSEMKT:SGAR) ETN. This note in particular stays invested in the sugar market by following the Barclays Capital Sugar Pure Beta Index. It charges investors 75 basis points a year for this exposure. The iPath Pure Beta Sugar ETN is up 8.3% year to date, outperforming its fellow iPath ETN thanks to the fact that the latter is exposed to front-month futures of the Dow Jones UBS Sugar Index, which has not done so well as the Barclays sugar index.

Finally, there's the only sugar ETF on the market, tracking a benchmark of several sugar futures: Teucrium Sugar Fund (NYSEMKT:CANE). This fund's price managed to make a 2.7% gain year to date -- a middling performance. Given its structure and exposure to sugar future contracts, this fund is the most volatile of the three, making it a bit riskier. It also charges a hefty 1.62% in expenses. However, if you foresee a spike in sugar prices, this ETF could be the best option -- if you time your transactions well and are prepared to exit the position to avoid losses.

SGAR Chart

SGAR data by YCharts. Data current as of March 13, 2014.

Final thoughts
These kinds of commodity supply issues are not easy to reverse, as new crops require a whole season to develop. So we will see volatility in prices until supply and demand find a price equilibrium. However, the disruption in prices for sugar has a cap coming from the supply side: Brazil accounts for 22% of world production of sugar. Plus, considering the drought, Brazil's central southern region's production will probably lose the previously estimated 7% increase for this new season, remaining flat at around 596 million metric tons of cane.

Given the increased risk and expenses of the Teucrium Sugar Fund, investors might want to go for the lesser-known ETNs. These instruments tend to generate fewer expenses, as they don't buy and sell the underlying asset like ETFs do. ETNs are designed so that they pay investors based on the price of the asset or index they follow only when the note matures. That way, fees and especially taxes remain significantly lower.. Why? When ETFs buy and sell assets, they trigger capital-gains taxes, but ETNs only trigger these when the fund is sold. So if you are more of a long-term investor, you could benefit from the ETNs' overall favorable tax treatment.

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