Commodities: Agriculture Cocoa
For whatever reason, the Cocoa segment has yet to attract any meaningful assets or volumes, so investors considering a targeted play on the commodity will have to contend with wide spreads
“the Cocoa segment has yet to attract any meaningful assets” and poor daily liquidity. There are just two ETNs in the segment, and the major difference between them is strategy. Both provide access to the core theme of cocoa, however, which is that of increased demand from developing nations, and uncertain supply from frontier market producers such as Cote D'Ivoire, Ghana and Cameroon.
NIB and CHOC charge 75 and 85 bps, respectively, and although NIB's AUM asset base beats that of CHOC, the difference in Tradability and Efficiency between the two is marginal, so your choice is about contract selection. NIB's index tracks the front-month cocoa futures contract, which gives you the best proxy available for spot cocoa prices—NIB is also our Analyst Pick for the segment. CHOC, on the other hand, tracks the contract its index determines to be least impacted by contango. (Insight updated 03/28/17)
ETF.com Efficiency Insight
The difference in Efficiency between CHOC and NIB is negligible thanks in large part to similar cost structures (75 bps for NIB and 85 bps for CHOC). There are, however, differences between
“There are, however, differences between how each note arrives at its scores.” how each note arrives at its scores. NIB suffers in tracking thanks to a variable, path-dependent fee that rises when the ETN's reference index is above the level it was at when the note launched. While CHOC has ultimately been more expensive to hold over the past 2 years, it has been far more consistent and predictable.
Both notes will fall victim to a rising fee when the reference index is above the level at launch, regardless of whether your purchase price is above or below the current market price. Both notes lose points for their low AUMs and relatively high risk of closure. That said, ETNs are cheap to run and generally do not close prior to maturity.
As for tax considerations, the taxation of both ETNs is relatively straightforward: ETNs do not generate a K-1 and long-term gains are taxed at 20 percent, while short-term gains are taxed as ordinary income (maximum 39.6%). (Insight updated 03/28/17)
ETF.com Tradability Insight
Both notes have poor on-screen liquidity that drives wide average spreads. As such, any investor interested in active trading should look at broader agricultural commodities funds that
“Institutional investors should find both notes easy to trade” attract more daily volume. If you insist on trading CHOC and NIB, any order you place should be done using limit orders only, as market orders stand to get punished. NIB does get more daily volume (around $250K on a typical day vs. $50K for CHOC), but that has not made trading the fund any easier.
Institutional investors should find both notes easy to trade, as both ETNs score a 5 out of 5 in our measure of block liquidity. (Insight updated 03/28/17)
ETF.com Fit Insight
Although the performance difference between the two notes has been relatively small, the difference in how each index selects its contracts could produce distinctly different returns moving
“the performance difference between the two notes has been relatively small” forward. NIB's index, like our benchmark, simply tracks the front-month cocoa contract, which gives it the most sensitivity to short-term price changes.
CHOC tracks the cocoa contract that its index provider has determined to be least impacted by contango, so the portion of the curve that investors have exposure to will change over time. (Insight updated 03/28/17)