The Next Hot Commodity

Tickers in this Article: JJS, SGG, BAL, JO, NIB

In 18 months the S&P 500 has dropped 9%, but don't let this discourage you. There have been several sectors in the market that have moved higher, but none more so than the commodities. Gold has risen nearly 50% and oil is up over 125% in the same timeframe. Corn and wheat, although less closely followed, have seen their prices double since 2007.

There is a worldwide commodity boom taking place and if you aren't involved in the action you are missing out on the profits. Just this past week the iPath family of exchange-traded notes (ETNs) introduced 10 new ETNs that focus solely on commodities. Several of the ETNs launched are tracking commodities that were not covered in the past, opening up new and exciting opportunities for investors. The five that are highlighted below are considered "soft" commodities and could be the next sector to attract big money. (For related reading, check out Water: The Ultimate Commodity and Who set the price of commodities?) 

New Opportunities in Commodities
Cocoa - iPath Dow Jones-AIG Cocoa ETN (NYSE:NIB)
The ETN will track the price of the cocoa futures, which over the past 18 months have doubled and most recently skyrocketed to a new 28-year high. There are reports of a possible supply squeeze for cocoa from Côte d'Ivoire (Ivory Coast), the world's top grower. On top of that it, the demand for all types of food worldwide has been increasing, thus resulting in higher futures prices.

Coffee - iPath Dow Jones-AIG Coffee ETN (NYSE:JO)
The coffee futures have not taken off like cocoa or many of the grains, but it is up 25% since the end of 2007. The fact that coffee remained strong versus the stock market and has little correlation to the S&P 500 (0.14), this could be the next soft commodity to rally. Adding to the bullish argument is the fact that Chinese people are starting to open up to drinking coffee instead of their daily tea. If they begin to follow the Western philosophy regarding coffee, the demand will increase dramatically for years to come.

Cotton - iPath Dow Jones-AIG Cotton ETN (NYSE:BAL)
The cotton futures moved sideways for years until a breakout in mid-2007 sent the commodity to a new multi-year high. Since the beginning of 2007 the futures are up about 30%, again a solid gain versus the stock market. The weather around the world has affected the cotton crop and again the demand story as more emerging markets around the globe can afford clothing.

Sugar - iPath Dow Jones-AIG Sugar ETN (NYSE:SGG)
The sugar futures have been the laggard of the "soft" commodities. Since 2007, the futures are basically flat as nearly every commodity enjoyed a gain. Unlike corn, sugar is not the main ingredient for ethanol here in the US. Brazil on the other hand uses sugar to create ethanol and is one of the few countries that rely heavily on the fuel. As the price of the other commodities move to ridiculously high levels, it may be time to consider sugar as an investment alternative.

A Bit of Everything - iPath Dow Jones-AIG Softs ETN (NYSE:JJS)
If you are not yet up to investing in a single commodity, the Softs ETN could offer you just what you need. As of May 31, JJS allocated 37% of its assets to coffee futures, 34% to sugar futures, and 29% in the cotton futures. The only problem is that cocoa is the hottest of the commodities right now, and it is not included. However, for most long-term investors an ETN composed of a basket of commodities is the better choice.

More Diversity
With the Dow on the brink of officially falling into bear-market status, this is the type of environment in which investors need to consider diversification. Commodities are more than a necessity for long-term investors, and now the soft commodities are a choice for added diversification.

ETNs offer yet another way to track an index. Find out what they have to offer, and what's at stake, in our related article Exchange Traded Notes - An Alternative To ETFs.

By Matthew McCall

Matthew McCall is the president of Penn Financial Group, LLC, a registered investment advisor. He also publishes two newsletters, The ETF Bulletin and The PFG Letter as well as other educational material. As a registered investment advisor, he manages clients' investments based on their specific goals and objectives.

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