Sugar ETPs Looking Sweet

June 06, 2011



Sugar Returns The Sweetest

The largest return has come from the iPath Dow Jones – UBS Sugar Sub Total Return ETN (NYSEArca: SGG), which is the closest investors can get to tracking the raw price of sugar.

SGG tracks an index that follows front-month futures contracts, and rolls its exposure over to the next month’s contract before expiry of a given front month.

The iPath Pure Beta Sugar ETN (NYSEArca: SGAR) meanwhile provides protection for long-term investors looking to avoid the risks of roll costs that come with a market that’s in contango.

While this fund may be a great choice for long-term investors, the sugar market is currently in backwardation, meaning that the priciest contract is the next one to expire. That’s a state of affairs that suggests bona fide tightness in supplies, and that allows fund managers to profit each time they roll exposure to a less-expensive contract—exactly the opposite of contango.

Many investors will see problems in investing in a commodity they know little about.

To the extent that such cautionary impulses are sensible, at the very least, sugar’s recent performance argues for the benefits of picking a broad commodity fund that’s diversified across commodity sectors.

The United States Commodity Index Fund (NYSEArca: USCI), which seeks to invest in commodities that exhibit the least contango, is currently invested in all three of the major softs. USCI is an ETF based on an equal-weighted index that invests in 14 commodities, and softs now make up over 21 percent of the portfolio.

Compare that with the iShares S&P GSCI Commodity-Indexed Trust (NYSEArca: GSG), which has no exposure to softs and is 69 percent invested in energy—almost half of it in crude oil. The GSCI may resemble the market for commodities in some respects, but it sorely lacks in diversification.

Diversification makes more sense the longer the holding period, so we looked at six-month returns on USCI, GSG and the PowerShares DB Commodity Tracking Index Fund (NYSEArca: DBC), a $6.29 billion ETF that’s easily the biggest multicommodity ETF on the market.


Ticker Fund 6-Month Return AUM
(in millions)
USCI United States Commodity Index Fund 9.76% $478.13
GSG iShares S&P GSCI Commodity-Indexed Trust 7.46% $1,718.91
DBC Powershares DB Commodity Index Tracking Fund 13.56% $6,289.10


At the end of the day, the point is that while oil may be the lifeblood of the global economy, a whole slew of other commodities are in a bull run too.

So, integrating softs, such as sugar, into an investment portfolio makes a whole lot of sense, whether through a super-focused single-commodity ETN like SGG or a diversified ETF like USCI.


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