CHOC Ipath Pure Beta Cocoa Etn (delisted)

Although a risk-on trade has boosted commodity prices in the past few days, virtually all commodities are still down on both the quarter and the year. Seemingly, the European slowdown and the stronger dollar have conspired to keep natural resources under pressure, curtailing both demand and risk tolerance for this often volatile investment class.

This has been especially the case in the agricultural commodity ETF sector as of late. At time of writing, 25 of the 27 products in this segment—and 24 of 24 if one removes livestock—are down this quarter, while all except for two are down from a year-to-date look (read Top Three Precious Metal Mining ETFs).

In fact, DBA, the PowerShares DB Agricultural Fund which is the most popular product in the segment, is down about 6.6% this quarter while it has lost about 9.2% from a year-to-date perspective. With more of a sector look, the results can be even bleaker as softs have been leading on the downside, thanks to 15% (or more) losses just this quarter in cotton, sugar, and coffee (see Hard Times In Soft Commodity ETFs).

However, while many soft commodities have been plunging, the bearish trend hasn’t stretched across the entire board. In fact, the top cocoa ETN (NIB) has been a decent performer while the rest of the space has more or less collapsed in 2012.

The cocoa ETN is down about 1% so far this quarter while it has added nearly 3.7% so far in 2012. This puts it in rare company among agricultural commodities; it is both a top five performer from QTD and YTD readings.

Although this relative strength is encouraging, it is a little less encouraging when looking from the longer term. Over the past year NIB has fallen by about 26% with a similar loss over multi-year periods as well suggesting that the product faced its pain much either than other, similar products in the space, meaning that it hasn’t been much of a safe haven investment in the sector.

Seemingly NIB and the cocoa market have bottomed out as the product has had significant trouble falling below the $27/share mark. Political troubles have also assisted NIB as of late, as conflicts in many of the top cocoa producing regions of the world—specifically in Western Africa—have also left traders on edge in this soft commodity (see Three Commodity ETFs That Have Not Surged).

Either way, it looks as though NIB could be a decent choice for investors looking to maintain exposure to the soft commodity space. The product seems to have found a floor near its current depressed price unlike many other commodities in the soft commodity world.

So while NIB may not be much of a safe haven in the traditional sense, the product could still be a quality choice for those seeking exposure to the commodity markets with less downside volatility at this juncture.

The Rest of the Sector

However, it is also worth noting that while NIB has been a star relative performer, its ‘pure beta’ counterpart tracking the cocoa market, CHOC, has not. This ETN uses a more dynamic technique to select contracts, hoping to better match returns over longer time periods and minimize contango (read BNP Paribas Enters ETF World, Debuts Commodity Fund).

Unfortunately, the product has slumped along with other soft commodity ETNs over the short-term as CHOC has lost about 9.1% this quarter and 7.4% so far in 2012. Furthermore, the product is actually also a worse performer than NIB over the one year period too, underperforming its competitor by close to 400 basis points.

Another concerning aspect is that the volume on CHOC can be pathetic, making it hard for investors effectively enter and exit the product. In fact, there was a stretch of about 10 days in May when the ETN didn’t trade at all giving the note a high average bid ask ratio and a low rating in terms of efficiency.

Thanks to this, issues of premiums and discounts, which can develop in some ETNs which are not very liquid, tend to be a big driver of returns in CHOC. This is unfortunate and is a situation that can be avoided by targeting NIB instead (see more on ETFs in the Zacks ETF Center).

So while cocoa may be an interesting play for investors at this time, it isn’t a blanket buy or sell across all the products in the space. Volume and product structure matter a lot and while NIB could be a good pick, CHOC certainly is not.

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IPATH-PB COCOA (CHOC): ETF Research Reports
 
PWRSH-DB AGRIC (DBA): ETF Research Reports
 
IPATH-DJ-A COCO (NIB): ETF Research Reports
 
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