Commodities: Agriculture Coffee
Perhaps no commodity attracts investors with an "invest in what you know" mentality more than coffee. After all, 150M Americans drink coffee daily, and the country imports $5B of
“ the Coffee segment is home to just two products” the beans a year.
Like many of the individual commodity segments, the Coffee segment is home to just two products, both of which are ETNs. The choice between the two is straightforward, with one first-generation product (JO) tracking front-month-futures, and one second-generation product (CAFE) tracking a contract farther out on the curve with the lowest degree of contango.
The difference in total cost of ownership between the two is great, even if the difference in headline expense ratios between them is just 10 bps. JO is the dominant player, with $60M in assets—roughly 10 times that of CAFE—and earns our Analyst Pick ribbon. The larger asset base goes along with significantly more volume, and JO's 20 bp spreads are roughly half of the average bid/ask spread on CAFE—which trades thinly.
Although CAFE should ostensibly provide a more sophisticated play on coffee that mitigates the impact of contango, to date, the fund's performance has looked eerily similar to that of JO. Moving forward, the shape of the futures curve for coffee may change, lending more credence to CAFE's strategy, but given the recent state of the market, it's hard to justify the higher cost and dearth of liquidity currently ailing CAFE. (Insight updated 10/20/17)
ETF.com Efficiency Insight
Since there is so little separating the two funds in terms of cost (JO charges 75 bps annually while CAFE charges 85 bps), the difference in Efficiency scores between them is minimal.
“Inside the numbers, however, there are some differences.” Inside the numbers, however, there are some differences.
The first difference comes down to tracking: CAFE has tracked its index with more consistency than JO over the past 2 years, and the lack of relative volatility makes its true holding cost easier to predict. The reason for the larger range of tracking differences for JO is owed to a nuance in its prospectus that allows for the note to charge a higher fee when the value of the index is higher than the level it was at on the date of launch. In other words, the fee charged by both ETNs is variable and path dependent, and since CAFE's index has been down over all periods of study since its launch, its fee has actually been lower than you might expect. To that end, JO has been a victim of its own (limited) success. On the other hand, CAFE is currently pegged as a high threat to close by our fund-closure risk score, which suppresses its otherwise-strong Efficiency score. That high risk of closure should be taken with a grain of salt though, as both products are ETNs, and it's unlikely iPath will close the fund before its maturity, given the low cost of running an ETN.
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 10/20/17)
ETF.com Tradability Insight
JO is far and away the more liquid of the two notes. This should come as no surprise considering JO has almost $100M in assets, while CAFE has less than $7M in AUM to work with.
“JO is far and away the more liquid of the two notes.” than $2M worth of JO changes hands most days, at spreads that average roughly 20 bps. Limit orders are still strongly advised, but the market for JO shares is considerably tighter than that of CAFE. By comparison, CAFE doesn't trade at all on some days, and spreads often exceed 50 bps. Market orders will punish you, as the average inside spread may understate what the market makers will actually charge. The fact is, the paltry asset base CAFE currently has is not enough to provide a liquid market for its shares.
Institutions may be able to get better fills in both notes when working with liquidity providers, but it's in your best interest to shop around to ensure you get the best pricing available. (Insight updated 10/20/17)
ETF.com Fit Insight
On the surface, the two products should provide distinctly different exposure to the coffee curve. JO, like our benchmark, tracks front-month coffee futures, while CAFE uses an optimization
“JO, like our benchmark, tracks front-month coffee futures” strategy to select the contract on the curve with the least amount of contango. To date, this has made little difference, as both funds have similar returns over the past year.
Things can certainly change in a hurry, and investors basing their decision solely on exposure should opt for JO if they want exposure to short-term price changes. On the other hand, if you're looking for longer-term exposure, CAFE will likely provide it, unless of course the front-month contract is determined to be less impacted by contango or backwardation. (Insight updated 10/20/17)