Broadly speaking, commodities are not the place to be this year. In the world of exchange-traded funds (ETFs), single-commodity funds are among this year's worst performers. Diversified products have not been much better. For example, the PowerShares DB Commodity Index Tracking Fund (DBC), which tracks a basket of more than a dozen commodities, is lower by 7 percent. However, there are some patches of strength within the commodities complex. Investors just need to know where to look and be willing to embrace more exotic fare than gold, silver or oil.

Just look at the iPath Bloomberg Cotton Subindex Total Return ETN (BAL). BAL, the largest exchange-traded product (ETP) dedicated to cotton, is up almost 12 percent year to date and nearly 29 percent over the past year. As its name implies, BAL is an exchange-traded note (ETN), which sounds like an ETF but is quite different. ETNs are a type of unsecured, unsubordinated debt security of an issuing bank. In the case of iPath ETNs such as BAL, the issuing bank is Barclays PLC (BCS). As debt instruments, ETNs expose investors to the issuer's creditworthiness​, meaning that owners of iPath ETNs should hope that Barclays maintains strong financial health. (See also: Sugar and Cotton ETF Trade Setups.)

Back to BAL, the cotton ETN tracks the Bloomberg Cotton Subindex Total Return, which "currently consists of one futures contract on the commodity of cotton which is included in the Bloomberg Commodity Index Total Return," according to iPath. BAL has a stablemate – the iPath Pure Beta Cotton ETN (CTNN). CTNN tracks the Barclays Cotton Pure Beta TR Index. That benchmark "may roll into one of a number of futures contracts with varying expiration dates, as selected using the Barclays Pure Beta Series 2 Methodology," according to the issuer. (See also: Commodities: Cotton.)

BAL and CTNN have spiked in recent days because cotton futures are trading at their highest levels in nearly three years, but tight supply conditions may not linger, and that could force profit taking in the often volatile BAL and CTNN. "The tight domestic supply may not last. U.S. production is expected to climb 12 percent in the season that begins August 1, with stockpiles at the end of the season surging 56 percent to 5 million bales, the U.S. Department of Agriculture forecast last week," according to Bloomberg.

Traders seem to preparing for decreasing cotton prices, as highlighted by BAL's Tuesday decline of nearly 5 percent on more than double the usual volume. That could be a sign that BAL and CTNN ran up too far too fast. (See also: Trading the Soft Commodities Markets.)


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