Time To Add A Cup Of JO To Your Portfolio?

by on September 8, 2010 | ETFs Mentioned:

As the ETF world continues to expand, one of the most popular market segments has become the commodity ETF space, which has seen countless innovations over the past few years. One product that has begun to attract a great deal of attention is the iPath Dow Jones-UBS Coffee ETN (JO), which has seen renewed interest thanks to massive supply shortages and increased demand in a variety of emerging markets. That has propelled coffee prices sharply higher–contracts are now hovering near a 13-year high. And while skyrocketing coffee prices are yet to translate into a pricier cup at your favorite coffee shop, it seems likely that a passthrough to the consumer is only a matter of time.

As a way to protect against further appreciation, a recent article in the Wall Street Journal advised ‘investors’ to stock up on coffee beans for the coming crunch. “If coffee prices stay high, it may make sense at some point for die-hard drinkers to start stocking up,” writes writes Brett Arends. “If you buy the beans green and roast them yourself, they will stay fresh longer. You’re earning no interest on the money you have in the bank anyway, so the ‘opportunity cost’ of the money is minimal. You might as well withdraw some of it and buy your coffee ‘forward.’” While this may be a viable idea for some coffee addicts, JO represents an alternative option for investors looking to bet on a continued rise in coffee prices [also read Ultimate Guide To Agricultural ETFs].

Why Coffee Still Might Have Room To Run

There are a number of reasons why coffee futures could continue their upward trajectory. Weather issues in a variety of Latin American countries–including major coffee growing regions in Brazil and Colombia, which have seen poor harvests–have further exacerbated supply problems. According to some analysts, U.S. stocks of unroasted green coffee beans have fallen by about a fifth in a year, while inventories in warehouses certified by the Intercontinental Exchange dropped by close to 33% since last fall. This suggests that any future bumper harvests are likely to go back into replacing sagging inventory levels and are unlikely to help keep a lid on coffee prices in the near-term. It looks as though this coffee crisis could continue for years, until more supplies come online for the ever-popular drink [also see Definitive Guide To Coffee ETF Investing].

JO tracks the Dow Jones-UBS Coffee Subindex Total Return, a benchmark that consists of one futures contract on the commodity of coffee. The fund could offer potentially valuable diversification benefits; it’s beta of just 0.44 is among the lowest of commodity ETFs. In addition to spreading out risk, JO has provided investors with an incredible level of return; it has posted a 35% increase so far in 2010 and is up close to 42% over the last three months. Should the coffee crisis intensify, look for investors who have bought up JO to reap the benefits of fight off any autumn slowdown in their portfolios [for more on JO's soaring summer, check out Coffee ETF Gives A Jolt To Investors' Portfolios].

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Disclosure: No positions at time of writing.