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I am looking at ETFs that track coffee price indices and I have noticed that there is quite big discrepancy between the ETFs underlying coffee indices (Dow Jones-UBS Coffee is an example) and the actual coffee price.
To make it clear, here is the coffee price:
https://www.macrotrends.net/2535/coffee-prices-historical-chart-data
https://www.investing.com/commodities/us-coffee-c

And here is the index price:
https://www.investing.com/indices/dow-jones-ubs-coffee

If you look at the period from 2001 to 2009 the coffee price grew almost 3x while the index dropped by ca. 30%.
Does anybody know where this difference come from. I was thinking that it could be some additional costs to the ETF but the difference seems to big for that.

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    $\begingroup$ US Coffee C are futures prices in dollars, dow jones ubs coffee BUCKCDE is a total return index in Euros from investing in coffee futures, macrotrends historical chart is not clearly labeled but is probably Spot price (not futures) in dollars. So they are 3 different things. ETF's generally trak futuures, which over the long run can behave differently from Spot. $\endgroup$
    – Alex C
    Commented Aug 25, 2019 at 14:00
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    $\begingroup$ I suggest to compare two things, rather than three to keep it simpler... Also if you google contango effect ETF, you can read about the discrepancy between the oil ETF USO and the spot price of oil, which may be similar to what you are seeing in Coffee... $\endgroup$
    – Alex C
    Commented Aug 25, 2019 at 14:26
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    $\begingroup$ The ubs commodity etfs track indices with an embedded fee to account for replication and funding costs. The index of a "dj ubs" etf is probably bcom coffee (the dj commodity indices were all renamed to bloomberg commodity, administered by bloomberg, owned by ubs), the bcom indices hold front month futures and roll every other month to the next future (in some cases they'll roll to a Slightly further out future if its more liquid). This means that there is a basis component that accumulates in the level of the index. What I have described are the excess return versions, the total return... $\endgroup$
    – will
    Commented Aug 25, 2019 at 20:41
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    $\begingroup$ ... versions include a rate leg, amd the versions in other currencies have currency components to reduce the fx risks, where its adjusted on some basis. These indices slowly drift away from the spot value. They will also keep the performance from those times when the spot and futures prices diverge, or, say, when the front month explodes in value due to a temporary shortage, the index will climb, and it will then roll into the next future which has not experienced high returns. The spot then decreases again, while the index remains elevated. This is another example where they diverge. $\endgroup$
    – will
    Commented Aug 25, 2019 at 20:45

2 Answers 2

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Your “coffee price” is spot. Your “coffee index” (or ETF) is excess/total returns, i.e. it includes index rolls.

That is the impact of the contango or backwardation of coffee futures as they roll from one contract to the next.

See: https://www.bloomberg.com/quote/BCOMSP:IND https://www.bloomberg.com/quote/BCOM:IND

Commodity prices are down 10% in 5 years. Commodity returns are down 50%. It’s not just coffee.

https://www.investopedia.com/articles/07/contango_backwardation.asp offers an introduction:

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  • $\begingroup$ I did some calculations and it seems to be the right answer. I would add that since this index is in EUR and is hedged against EUR/USD this might also play a role. Anyway I am pretty new to this but the size of the divergence is quite surprising. Index spec for reference wisdomtree.eu/en-gb/-/media/eu-media-files/key-documents/… $\endgroup$
    – v0rin
    Commented Sep 1, 2019 at 18:18
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If the Index is priced in EUR based on the methodology, then that has an outsized effect on performance versus spot futures priced in USD. From 2001 to 2009, the EUR appreciated from near parity with the dollar to trading around 1.50 in November 2009. The futures roll returns are not important because that particular index BUKCDE is not an excess or total return index although they do have those versions of the index. Coffee like most commodities is typically in contango so it would have a negative roll yield but this would only apply if we were talking about the excess return version of the index.

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