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Should You Invest in a Coffee ETF?

Coffee

Investors who are looking for a stable agricultural commodity to invest in are eying the coffee market. The question most commonly asked, is there a coffee ETF, and is it a safe investment? At a time when investors are cautious, some analysts give the coffee market a thumbs up, but only within certain types of investment strategies. Of all the types of coffee investments, ETFs are the most stable. Your understanding of the coffee market and which segments represent the best investment options for your financial goals can help to choose whether or not to invest in coffee ETFs.

An overview of the current coffee market

Harvest Returns offers a look at the current condition of the coffee market as one of the most traded with Arabica leading the most prominent and Robusta coming in second. The market breakdown is 75% for Arabica and 25% of the market share for Robusta. The latter being the least expensive per share. The stability of the market remains based upon the growing season with ample precipitation and optimal growing conditions. One-third of the coffee produced in the world comes from Brazil, and to a lesser degree, Columbia and Vietnam. Coffee is grown in sub-tropical areas globally. The demand for coffee remains high and continues to increase. China, Japan, and the EU are large markets for imports representing billions of dollars in sales. The prospects are good for short to mid-term coffee markets.

Why Coffee ETFs are a lower risk,

The physical commodities market of coffee futures represents a higher risk for investors. We would be remiss not to point out the fact that trends in coffee futures have risen to double in short term investment scenarios, but just as quickly, the prices can bottom out, representing a significant risk of loss. The New York Board of Trade, operated by Intercontinental Exchange, trades coffee futures. The contracts stipulate a required margin for trade with a figure that sets back for each contract maintenance margin. Coffee futures are more volatile because of political unrest, weather conditions, and supply and demand highs and lows. These represent a higher risk than Coffee ETFs.

What is Coffee ETFs?

According to Commodity.com, Coffee ETFs are financial instruments that trade on exchanges like shares. They are traded much like stocks are in the market. There is a difference between an ETF and an ETN. The ETF holds the assets in a fund while the ETN distributes dividends to investors, similar to a bond.

Which are the best coffee ETFs?

According to Zacks, trading ETFs or exchange-traded funds is a lower risk method for investing in coffee. There are several available coffee ETFs to choose from, but of them all, just two are coffee-centric in their investment themes. The coffee futures contracts expire monthly. JO forwards the contract over to the next. iPath Pure Beta Coffee created their method for rolling contracts that will expire soon into the coming months. According to Investopedia, the two ETFs tracking the coffee market's performance are the iPath Dow Jones-UBS Coffee Subindex Total Return ETN, also referred to as JO, and the iPath Pure Beta Coffee ETN, referred to as CAFE. JO is the largest coffee ETF while CAFE is second.

How to invest in a coffee ETF

You need to set up an individual account for trading to invest in a coffee ETF. According to Alice Stewart of The Nest, there are three steps involved with investing in Exchange Traded Funds. You are required to decide which ETF of the two represents the lowest risk at the time of investment. You must decide whether to invest in an ETF that is 100% focused on coffee or if you prefer to diversify with a coffee ETF that is also involved with other commodities. JO is the coffee ETF that is 100% based on coffee, and it offers a monthly contract that allows you to make alterations if you're not pleased with the selection made for the month. The ETF format provides you with a solid information base from which to make investment decisions. It's not a complicated process, although there are fees involved in trades.

In Stewart's recommendation, the third step involves decreasing your risk by choosing whether to invest in Pure Beta Coffee ETN. This ETF does not perform a monthly rollover but decides to shift investments based on the current trends in prices reflected over several months. They sometimes move holdings to minimize risk and damage. Both of these coffee ETFs are funds that are exchange-traded notes. Barclays Bank issues the notes. Each provides investors with an instrument for tracking the coffee market, which can be advantageous for strategic planning.

Conclusion

Should you invest in a coffee ETF? There are compelling reasons to make this type of investment if you are interested in diversifying your portfolio. There is a strong rationale for investing in EFTs over other types of investments in the coffee market as it represents a less volatile avenue with lower associated risks. It is worth noting that any investment carries a degree of risk. The coffee market tends to have ups and downs. Although the demand is currently high, other factors can affect its overall value and the returns on investment. A benefit of investing in ETFs over different segments of the coffee market is the opportunity for tracking the trends through time and having the option of pulling your investment monthly if you're not happy with the progress of the ETFs. It's a relatively simple process. Although you stand to make a more substantial ROI in trading coffee futures, the volatility of the market represents a much higher risk and the possibility of losing your entire investment. These are the reasons why we recommend coffee ETFs over other types of coffee investments.

Allen Lee

Written by Allen Lee

Allen Lee is a Toronto-based freelance writer who studied business in school but has since turned to other pursuits. He spends more time than is perhaps wise with his eyes fixed on a screen either reading history books, keeping up with international news, or playing the latest releases on the Steam platform, which serve as the subject matter for much of his writing output. Currently, Lee is practicing the smidgen of Chinese that he picked up while visiting the Chinese mainland in hopes of someday being able to read certain historical texts in their original language.

Read more posts by Allen Lee

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