Top Coffee ETFs (JO, CAFE)

Coffee is nearly as popular with commodity traders as it is with sleepy people first thing in the morning. Coffee is by far the most widely traded of the "breakfast commodities" group, which is composed of coffee, sugar, cocoa and orange juice. It is also the most actively traded agricultural crop among tropical commodities.

The United States is the largest consumer of coffee at nearly half a billion cups per day, but Canada, Mexico and Europe are not far behind. The number one producer of coffee is Brazil, accounting for nearly 60% of total worldwide coffee production. Because of this fact, coffee prices, which are notoriously volatile on a seasonal basis, are significantly affected by the weather in Brazil and, to a lesser extent, by the relative value of the Brazilian currency, the real. A one-month period in 2014 saw coffee futures prices rise, and then fall, approximately 20%.

The number two and three coffee-producing countries are Vietnam and Colombia. Vietnam produces primarily the robusta variety of coffee that has a higher caffeine level than the more popular arabica variety produced in Brazil, Colombia and other major coffee-producing nations such as Ethiopia.

Worldwide supply and demand are primary drivers of coffee prices. The demand for coffee, slightly on the increase since the year 2000, is relatively stable, although it can be impacted by the level of discretionary income of consumers. The supply, or perceived future supply, of coffee can and does vary greatly from year to year. In similar fashion to factors that affect orange juice, good weather and bumper crops typically send prices tumbling, while drought or other natural disasters that threaten the world's coffee crops usually cause prices to skyrocket. It is not unusual to see coffee futures double in price or fall by half in the course of a single year.

There are two exchange-traded funds, or ETFs, available to U.S. investors and other investors that directly track the performance of the coffee market: the iPath Dow Jones-UBS Coffee Subindex Total Return ETN (JO) and the iPath Pure Beta Coffee ETN (CAFE).

The iPath Dow Jones-UBS Coffee ETN

The iPath Dow Jones-UBS Coffee Subindex Total Return ETN offers the potential returns available through an unleveraged ETF investment in coffee futures contracts. It is intended to reflect the performance of the Dow Jones Coffee Index, by holding coffee futures contracts in the most nearby month. The fund also includes the rate of interest earned from cash collateral invested in U.S. Treasury bills (T-bills).

The fund's expense ratio is 0.75%. Since the fund's holdings are futures contracts rather than stocks, there is no dividend yield. JO is the largest and most liquid coffee ETF, with total assets of over $100 million.

The iPath Pure Beta Coffee ETN

The iPath Pure Beta Coffee ETN, which is intended to reflect the performance of the Barclays Capital Coffee Pure Beta Total Return Index, differs from the iPath Dow Jones-UBS Coffee Subindex ETN primarily by investment strategy. Both seek to profit through investment in coffee futures contracts, but while the JO fund maintains investment in the front trading month for coffee futures, the strategy employed by the Pure Beta Coffee ETN follows no such standardized rollover practice from one trading month to the next. The choice of trading months is at the discretion of the fund manager, who may choose to invest in a number of different trading months in an effort to avoid the negative effects of contango and profit from normal backwardation of futures prices.

This fund also has an expense ratio of 0.75%. With only $5 million in assets and a correspondingly lower average daily trading volume, the Pure Beta fund offers less liquidity than JO. Both of these funds are exchange-traded notes issued by Barclays Bank. Either fund may appeal to investors seeking to use ETFs to speculate on coffee futures prices.

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