Credit: Agricultural commodities are the fundamentals of life: water, wheat, sugar, soybeans, livestock, hogs, timber, cotton. Agricultural commodity ETFs are a hedge against inflation because food prices often head higher first. These ETFs are currently out of favor but long-term investors can expect a reversion to the mean.
Agricultural Commodity ETFs face evident headwinds. Inflation is at 45-year lows. The dollar is at 5-year highs. Although demand for basic agricultural commodities is somewhat inelastic, lower estimates for global output can also hurt commodity prices and these estimates have recently turned lower. The impact of these trends is shown on this price chart comparing an agricultural commodity ETF, the Deutsche Bank Agriculture ETF (NYSEArca:DBA) with the domestic equity benchmark, the Standard and Poor Depositary Receipts (NYSEArca:SPY).
As the chart shows, equities and commodity ETFs have parted ways. DBA is almost a pure food products commodity play. Prior to October of 2009, DBA held futures contracts on corn, wheat, soybeans and sugar-- each representing approximately 25% of the fund. Subsequently regulators forced substantial changes in DBA's portfolio, making it more diverse. It currently holds futures contracts on coffee, corn, cocoa, sugar, wheat, live cattle, feeder cattle, hogs, soybeans, and a small position in cotton. In the revised fund, cattle and soybeans are the fund's largest holdings.
Both as a portfolio diversification tool and as a hedge against inflation, a more diversified DBA is a benefit to investors. Although some may argue that regulation hurt investors in DBA, the virtues of diversification can be seen when comparing DBA with a smaller ETN focused on grain, the iPath DJ-UBS Grains TR Sub-Idx ETN (NYSEArca:JJG).
JJG holds futures contracts on just soybeans, wheat, and corn. Three quarters of the fund holdings are in wheat and soybeans alone, with a smaller corn position. Prices in these commodities are volatile and often correlated. Adding additional commodities helped DBA outperform in this period. Separately, JJG is an ETN, which means that it also carries credit risk (exposure to Barclay's).
The biggest risk to JJG may be contango, the cost of carry. Like DBA, JJG is made up of futures contracts that are rolled over before expiration to maintain exposure. This means that if the spot price is lower than the futures price, each month the fund must pay a premium to roll over futures contracts. For some investors this impact may be muted, ironically by what some regard as a further problem with commodities ETFs: their tax structure.
Unlike stock and bond ETFs, commodity ETFs are formed as partnerships and therefore issue K-1 forms. Because partnerships are pass-through entities, gains and losses in the fund are passed through to the fund's partners. This generates either tax gains or losses regardless of the performance of the fund. If gains are generated, tax due needs to be funded from other sources. If losses are generated, tax losses may be used to offset other income. In a contango situation, roll-over losses may be expressed as partnership losses on a K-1, providing investors with losses to offset gains elsewhere, thereby mitigating losses due to contango somewhat.
One alternative to investing in commodity futures based ETFs is the Market Vector Agribusiness ETF (NYSEArca:MOO). Rather than owning futures contracts of commodities themselves, this ETF holds equity in companies in the agriculture business. MOO's holdings for example include fertilizer and feed products producer Potash ( POT ) and agricultural products giant Monsanto ( MON ). The chart below shows how MOO compares to DBA and the SPY.
As the chart below shows, MOO's performance over the last twelve months is between the equity benchmark SPY and the futures-based commodity fund DBA.
Following are major agricultural commodity ETFs, specialized ETFs, and their expense ratios.
BROAD COMMODITY
BROAD COMMODITY
GreenHaven Continuous Commodity Index Fund ( GCC ), 0.85%
iShares GSCI Commodity-Indexed Trust ETF ( GSG ), 0.75%
PowerShares DB Agriculture (NYSEArca:DBA), 0.75%
AGRIBUSINESS
AGRIBUSINESS
Market Vectors Global Agribusiness ETF (NYSEArca:MOO), 0.58%
Claymore/Beacon Global Timber Index (NYSEArca:CUT), 0.95%
WATER
WATER
PowerShares Water Resources (NYSEArca:PHO), 0.64%
PowerShares Global Water (NYSEArac:PIO), 0.75%
Claymore S&P Global Water (NYSEArca:CGW), 0.70%
First Trust ISE WATER INDEX (NYSEArca: FIW), 0.60%
TIMBER
TIMBER
iShares S&P Global Timber & Forestry Index (NasdaqGM:WOOD), 0.48%
SHORT/LEVERAGE
SHORT/LEVERAGE
ProShares Ultra DJ-AIG Commodity ETF (NYSEArca:UCD), 0.95%
ProShares UltraShort DJ-AIG Commodity ETF (NYSEArca:CMD), 0.95%
SPECIALIZED ETNs
SPECIALIZED ETNs
iPath DJ-UBS Sugar TR Sub-Idx ETN (NYSEArca:SGG), 0.75%
iPath DJ-UBS Coffee TR Sub-Idx ETN (NYSEArca:JO), 0.75%
iPath DJ-UBS Cotton TR Sub-Idx ETN (NYSEArca:BAL), 0.75%
iPath DJ-UBS Cocoa TR Sub-Idx ETN (NYSEArca:NIB), 0.75%
iPath DJ-UBS Livestock TR Sub-Idx ETN (NYSEArca:COW), 0.75%
ELEMENTS MLCX Grains Index TR ETN (NYSEArca:GRU), 0.75%
UBS E-TRACS CMCI Food TR ETN (NYSEArca:FUD), 0.75%
ELEMENTS MLCX Biofuels Index TR ETN (NYSEArca:FUE), 0.75%
Jonathan Bernstein has been writing about ETFs since 2003 and is the author of Sector Trading: A Year in Exchange Traded Funds .
Jonathan Bernstein has been writing about ETFs since 2003 and is the author of Sector Trading: A Year in Exchange Traded Funds .Jonathan BernsteinSector Trading: A Year in Exchange Traded Funds
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
