Commodities: Agriculture Sugar
SGG dominates the tiny Sugar segment in both assets and liquidity, and provides the best overall, basic exposure to sugar futures. Structured as an ETN and launched in June 2008, SGG was
“SGG dominates the tiny Sugar segment in both assets and liquidity” the first exchange-traded product to specifically target sugar. Its modest assets are miniscule compared with the largest funds in most other segments, but SGG is huge compared to its competitors, SGAR and CANE. It also accounts for practically all of the trading activity in the segment. For retail investors, SGG is a no-brainer. SGG follows a front-month strategy, making it the best Fit to our GSCI benchmark as well. The drawback for SGG—relatively poor tracking—doesn't stop it from earning Analyst Pick here.
SGAR and CANE have struggled to attract assets, and both are difficult to trade. That said, liquidity providers should be willing to fill large orders in both funds at a fair price. Both SGAR and CANE attempt to beat contango, but follow different strategies. SGAR follows an optimized strategy by selecting specific contracts out on the futures curve, while CANE holds 2nd- and 3rd-month contracts, along with the March contract following the 3rd-month contract in a laddered strategy. SGAR is structured as an ETN, while CANE's commodities pool structure comes with some unique tax implications. Commodities pools are taxed at a blended long-term and short-term capital gains rate regardless of holding period, are marked to market at year-end and are reported on a Schedule K-1 form. (Insight updated 03/28/17)
ETF.com Efficiency Insight
Investors looking for the most stable and established sugar-focused exchange-traded product should look to SGG, which first traded in 2008. Its AUM may not be substantial, but it represents
“SGAR and CANE have low assets and high closure risk” the bulk of assets in the segment. Meanwhile, SGG's two competitors—SGAR and CANE—have tiny assets and high closure risk.
While SGG's 0.75% expense ratio is the segment's lowest, its tracking has been loose, adding to its total holding costs. This is largely due to the fund's fee structure, which sees the fee increase when the reference index is above the level it was when the ETN launched. The path dependency of SGG's fee means the true holding cost will vary greatly over the course of a year depending on the performance of the index. SGAR, the other ETN, charges 10 bps more than SGG, but does a superior job of tracking its index.
CANE's eye-popping 1.77% expense ratio is the least of its worries—historically its tracking has been abysmal. Again, the fund's structure plays a role in this as well. As a commodities pool, CANE accrues its expenses on a daily basis and the low asset tally means the high fixed costs of managing the pool are spread very thinly. Should CANE attract more assets, tracking should improve. On the tax front, short-term investors could get a tax advantage with CANE because its commodities pool structure means gains from sales are taxed at a blended rate, regardless of holding period.
SGG and SGAR are ETNs, so gains are taxed at the long-term capital gains rates if shares are held more than a year. ETNs also come with credit risk of the bank issuing the notes—in the case of SGG and SGAR, Barclays is the counterparty. (Insight updated 03/28/17)
ETF.com Tradability Insight
For retail investors, SGG is clearly the standout here. Its volume accounts for the vast majority of all trading activity in the segment. While its spreads are often far from tight,
“For retail investors, SGG is clearly the standout here” they're manageable with carefully placed limit orders.
On-screen liquidity is problematic for both SGAR and CANE, which barely trade. Spreads are wide and unpredictable. Market orders should be avoided at all costs, while limit orders may expire unfilled.
Block liquidity paints a different picture. Sugar contracts are highly liquid, so all three funds should be easily tradable by institutional-sized investors. (Insight updated 03/28/17)
ETF.com Fit Insight
All three products are solely exposed to sugar futures contracts, but their similarities end there—their actual strategies couldn't be more different. SGG is most like our GSCI
“their actual strategies couldn't be more different” benchmark, and thus has the highest Fit score. It follows a first-generation front-month strategy, rolling over contracts nearing expiration to the next-month contract continuously on a monthly basis.
SGAR attempts to mitigate any effects of contango by selecting certain contracts out on the futures curve its index provider deems least likely to be affected by contango. Like SGAR, CANE also attempts to tackle contango, but it does so using a laddered approach. More specifically, it constantly holds 2nd- and 3rd-month contracts, along with the March contract following the 3rd-month-to-expire contract.
These differences in strategy, along with total holdings costs, translate to varying returns. (Insight updated 03/28/17)