Barchart.com ETF Research
Barchart.com's Picks in the Agricultural Commodity ETF Sector
ETF Research written by the Barchart.com ETF Research Team
Last Updated: December 23, 2010
Table of Contents
This report focuses on exchange-traded products (ETPs) in the agricultural commodity sector that track soybeans, livestock, and soft commodities such as sugar, coffee and cocoa. All the ETPs in this sector track futures contracts since there is no easy way to have a physical ETP that holds perishable commodities. This means that all of the ETPs in this sector can show substantially different returns than the spot prices of the underlying commodities due to the futures curve and the roll yield. Please see our report “Commodity Exchange-Traded Product (ETP) Performance and the Importance of the Futures Curve and Contango” for a complete explanation of this topic.We will first discuss the broad agricultural commodity funds that cover all those commodities in one fund. We will then discuss funds that track the sub-sectors of agriculture (grains, livestock, softs) and funds that track individual agricultural commodities.
DBA - PowerShares DB Agriculture Fund (web site link) – DBA, launched in January 2007, is the granddaddy of the sector with a hefty $2.6 billion in assets under management. DBA is an exchange-traded fund that holds futures contracts. The fund tracks the Deutsche Bank Liquid Commodity Index Diversified Agriculture Excess Return.™ The base weights for the index are as follows: 12.50% in corn, 12.50% in soybeans, 12.50% in sugar, 12.50% in live cattle, 11.11% in cocoa, 11.11% in coffee, 8.33% in lean hogs, 6.25% in wheat, 6.25% in Kansas wheat, 4.17% in feeder cattle, and 2.78% in cotton. The index is rebalanced back to the base weights once each year in November, but the exact weights will then fluctuate slightly during the year depending on the relative movement of the underlying commodities. DBA's exact weights at any given time are available at dbfunds.db.com/dba/weights.aspx. Figure 1 illustrates how corn has outperformed DBA by a wide margin in recent months because the other commodity components of DBA have not rallied by as much as corn, thus holding back the overall value of DBA. The fund has an expense fee of 0.85% and an estimated futures brokerage fee of 0.16%.
PowerShares DB Agriculture Leveraged & Inverse ETNs (web site link) – This family of ETNs, backed by Deutsche Bank, are based on the Deutsche Bank Liquid Commodity Index–Optimum Yield Agriculture™. The index weights are currently as follows: 25.76% in soybeans, 24.90% in wheat, 24.71% in corn, and 24.63% in sugar. These funds have an expense fee of 0.75%. This ETN family includes a long (1X), double long (2X), short (-1X), and double short (-2X) ETN product. Only the double long product, DAG, has enough assets under management for serious consideration at this time. DAG is a convenient and inexpensive way to get 2X leverage in this sector, but investors should remember that 2X leverage can also be obtained by buying a regular 1X agriculture fund on 50% margin. By the same token, an investor can get -1X short exposure by shorting a regular 1X agriculture ETP product in one's brokerage account.
RJA - Elements Exchange Traded Notes Rogers International Commodity Index - Agriculture Total Return (web site link) – RJA, launched in October 2007, has a substantial $470 million in assets under management but is still far behind DBA in terms of assets. RJA is an exchange-traded note and is an unsecured debt obligation backed by the Swedish Export Credit Corp, which is an entity connected to some extent with the Swedish government. The fact that this product is an ETN means that an investor could lose his/her investment in the unlikely event that the Swedish Export Corp declares bankruptcy or repudiates its obligations for some reason. This ETN provides a return based on the “Rogers International Commodity Index – Agriculture Total Return,” which in turn tracks a basket of futures contracts. The index covers a broad basket of commodities with the following weights: wheat (17.192%), corn (13.610%), cotton (12.034%), soybeans (9.599%), coffee (5.731%), live cattle (5.731%), soybean oil (5.731%), cocoa (2.865%), lean hogs (2.865%), lumber (2.865%), rubber (2.865%), KCBT wheat (2.865%), canola (2.149%), soybean meal (2.149%), orange juice (1.719%), oats (1.433%), rice (1.433%), rapeseed (0.716%), azuki beans (0.430%), greasy wool (0.286%). The fund has an expense fee of 0.75%.
JJA - iPath Exchange Traded Notes Dow Jones - AIG Agriculture Total Return Sub-Index ETN Series A (web site link) – JJA, launched in October 2007, has a respectable $128 million in assets under management. This product is an exchange-traded note and is an unsecured debt security backed by Barclays Bank PLC, which means that an investor in this product could lose his/her investment in the unlikely event that Barclays Bank declares bankruptcy. This fund has the following weights: soybeans (25.13%), corn (24.23%), wheat (15.27%), soybean oil (9.92%), coffee (9.53%), cotton (8.44%), and sugar (7.46%). This fund has an expense fee of 0.75%.
UBS E-TRACS ETNs – UBS has two ETN products in this sector but the assets under management in each of these products is less than $10 million at present. We suggest that investors stay away from these products unless the assets levels grow substantially. These ETN products are unsecured debt securities backed by UBS AG.
Our pick for the broad agricultural commodity group is the PowerShares DB Agriculture Fund (DBA) for the following reasons: (1) the fund size is very large at $2.6 billion with plenty of liquidity, and (2) DBA is an exchange-traded fund that holds futures contracts. All of the other products in this group are exchange-traded notes, which we do not favor when there is an attractive ETF available. ETNs are simply unsecured notes backed by a financial institution and an investor in an ETN must therefore carefully watch the credit quality of the financial institution backing the ETN to make sure he/she doesn't lose his/her entire investment in the ETN. DBA has a relatively high expense fee of 0.85% plus an estimated futures brokerage fee of 0.16%, but we think the higher fee is worth the peace of mind that goes with not having to worry about an ETN's credit quality. We like the commodity weights in DBA, which are broadly diversified across eleven agricultural commodities. Figure 2 provides a comparison of how DBA has performed versus RJA.Figure 2: DBA-PowerShares DB Agriculture ETF versus RJA-Elements Rogers Agriculture ETN (live chart link)
In addition to Barclays' iPath Agriculture ETN (JJA) that covers all three main agriculture subsectors in one fund, Barclays has three related ETN products that track each sub-sector of grains, livestock and softs. All three of these products are ETNs, which means they are unsecured debt securities back by Barclays Bank PLC. All three of these funds have an expense fee of 0.75%. Of these products, only the Grain ETN (JJG) has a substantial amount of assets under management at $168 million.
There are two other exchange-traded products that track agriculture sub-sectors, but neither of these funds has enough assets under management for serious consideration at this point:
There are currently five exchange-traded products that track single agricultural commodities. Barclays has four iPath ETN products that cover sugar, cotton, coffee, and cocoa. These ETN products are unsecured debt securities backed by Barclays Bank PLC. These ETNs all have an expense fee of 0.75%. Some investors may have an interest in an ETN that provides exposure to a single commodity, but investors should recognize that these are ETN products with credit-quality risks and that the assets under management in these products is relatively low. More active traders may find trading futures contracts to be a more cost-effective and convenient way to obtain exposure to these markets.
CORN - Teucrium Corn Fund (web site link) – CORN, launched in July 2010, currently has $40 million in assets under management. CORN is an exchange-traded fund that holds CBOT corn futures contracts. CORN attempts to mitigate the impact of the futures curve and contango by spreading its position into three contract months: (1) the second-to-expire CBOT corn futures contract (with a weight of 35%), (2) the third-to-expire (30%), and (3) the corn futures contract expiring in the December following the expiration date of the third-to-expire contract (35%). The fund has a relatively high expense ratio of 1.00%.
From the Barchart.com ETF Research Team