JO - JO: Better Monetize Your Coffee Gains Now

2023-04-29 05:35:19 ET

Summary

• The iPath Bloomberg Coffee Subindex Total Return ETN is an exchange traded note.
• Unlike ETFs, JO is a bond with a set maturity date.
• As we discuss in the 'Mandatory Redemption' section below, this financial instrument is set to mature on June 7, 2023.
• Retail investors should not try to time the market, and would be best served to crystallize the ETN's gains now.

Thesis

The iPath Bloomberg Coffee Subindex Total Return ETN ( JO ) is an exchange traded note. The fund aims to offer retail investors the total returns linked with coffee as a commodity:

The investment seeks return linked to the performance of the Bloomberg Coffee Subindex Total Return. The ETN offers exposure to futures contracts and not direct exposure to the physical commodities. The index is composed of one or more futures contracts on the relevant commodity (the “index components”) and is intended to reflect the returns that are potentially available through (1) an unleveraged investment in those contracts plus (2) the rate of interest that could be earned on cash collateral invested in specified Treasury Bills.

The fund has had a very robust performance in 2023, being up over 15%:

The price of coffee recorded decade highs last year on the back of poor weather conditions in Brazil and rising demand. After a significant pull-back in October-November, the commodity has resumed an upwards trajectory, despite forecasted weaker prices in the second half.

The issue at hand with JO is the fact that it will not exist in the second half of the year. As we discuss in the 'Mandatory Redemption' section below, this financial instrument is set to mature on June 7, 2023. That translates to a full crystallization of gains and losses on this fund on that date.

The issue faced by a retail investor with respect to set maturity dates is that of market timing. Any potential downturn in coffee prices right before the maturity date can completely wipe out the gains recorded in 2023, with no means of waiting to get them back. Fixed maturity investments like ETNs should be actively traded, not waited upon. There is a large market risk component that gets bigger as we approach the maturity date for this instrument. As we get closer to June 7, an investor who does not exit JO can face substantial losses on the instrument that will subsequently get crystalized when the ETN matures. If you are a retail investor sitting on capital gains in respect to JO, it would be prudent to monetize them now rather than take unwanted short term market risk.

JO Mandatory Redemption

The ETN is set to be redeemed in June by Barclays:

NEW YORK--( BUSINESS WIRE )--Barclays Bank PLC ("Barclays") announced today that it will exercise its issuer call option and redeem in full each of the 21 series of iPath® ETNs (the "ETNs") listed in the table below on June 14, 2023 (the "Redemption Date").

As described in the prospectus for each series of ETNs listed above, Barclays, as issuer of the ETNs, may redeem the ETNs in its sole discretion on any business day on or after the inception date until maturity. Holders of such ETNs on the Redemption Date will receive a cash payment per ETN equal to the applicable closing indicative value or daily redemption value, as the case may be, of the ETNs (each as defined in the prospectus relating to the ETNs) on June 7, 2023 (the "Valuation Date"), the fifth trading day prior to the Redemption Date (subject to postponement in the event of a market disruption event). Trading of the ETNs will be suspended before the market open on June 8, 2023.

Holders of ETNs subject to issuer redemption may choose to continue to hold their ETNs until the Redemption Date or choose to sell/redeem their ETNs at a suitable time prior to that, subject to the paragraph below.

ETN vs. ETF

Retail investors should be careful in differentiating between ETNs and ETFs. Many times nobody reads the fine print or the risk disclosures present in securities they purchase, but in fact they are quite important. ETNs are in effect bonds, with the risk characteristics associated with said asset class. An ETN is simply a bond with an embedded derivative , and it will always expose retail investors to redemption risk, default risk and counterparty risk. And we are clearly seeing that here with JO.

The most famous case of a bank bankruptcy is Lehman, and in effect there were a number of Lehman sponsored ETNs that serve a cautionary tale for ETN investors. Always ensure you understand the difference between an ETN and an ETF and be comfortable with the ultimate sponsor.

Conclusion

JO is a security that falls in the ETN sector. The fund provides retail investors with a return linked to coffee futures. The fund is in effect a bond issued by Barclays that has announced the redemption of said instrument on June 7, 2023. A retail investor needs to realize that a fixed maturity instrument like JO where the underlying exposure will fluctuate daily based on the coffee futures prices will pose a larger market risk as the maturity date approaches.

Nobody can time the market, and usually buy-and-hold investors deal with drawdowns by waiting out the instrument until gains are recorded again. We can see this in both the equity and fixed income space. Not here. A retail investor needs to understand that on June 8, 2023 JO will cease to trade, and any potential market loss will be crystalized fully, with no means of 'gaining it back'. Coffee is up more than 15% this year on the back of a stronger than expected rebound in demand, providing for a very nice total return for JO. An active investor long this security should actively think about monetizing those gains now rather than wait until the mandatory redemption in June.

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