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Pure-Play Corn ETF Ready to Make Debut

Stocks in this article: DBC DJP JJG

By Michael Johnston of ETF Database



Recent years have seen the launch of hundreds of new exchange-traded products, many of which offer increasingly granular exposure to various asset classes. The latest innovation comes in the commodity space, where Vermont-based Teucrium Trading filed with the Securities and Exchange Commission for an ETF that invests in Chicago Board of Trade corn futures. The Teucrium Corn Fund would hold a portfolio consisting of three separate corn futures contracts, including:

  • Thirty-five percent in the second-to-expire CBOT corn futures contract
  • Thirty percent in the third-to-expire CBOT corn futures contract
  • Thirty-five percent in the corn futures contract expiring in the December following the expiration month of the third-to-expire contract.

So the fund, which would trade under ticker "CORN," would fall somewhere in the middle of the "contango" continuum for futures-based exchange-traded products. The fund would "roll" its holdings less frequently than ETFs like the United States Natural Gas Fund (UNG) that invest only in near-month contracts, but less frequently than UNG's cousin, the United States 12-Month Natural Gas Fund (UNL), which invests in the near-month contract and the contracts for the following 11 months.

The impact of contango -- an upward-sloping futures curve -- on bottom-line returns can be significant in commodity products, a fact some investors have learned the hard way. The market for corn futures in currently in contango; December 2010 contracts cost about 10% more than contracts expiring in July (the second-to-expire contract).

CORN could become the first U.S-listed pure-play corn ETF. Corn receives a minor allocation in most diversified commodity products (it makes up about 5.6% of PowerShares DB Commodity Index Tracking (DBC) and 7% of iPath Dow Jones-AIG Commodity Idx TR ETN Profile (DJP) and makes up a major slug of the two grains ETPs currently available.

The iPath Dow Jones-UBS Grains Total Return ETN (JJG) gives corn a weighting of nearly 36%, while the ELEMENTS MLCX Grain ETN (GRU) gives an allocation of about 27%. Both JJG and GRU are structured as exchange-traded notes, meaning that they are exposed to the credit risk of the issuing bank. CORN would be structured as an ETF.

CORN's expense ratio is listed at 1%, making it one of the more expensive commodity products; JJG and GRU both charge an expense ratio of 75 basis points.

At the time of publication, Johnston had no positions in the securities mentioned.

Michael Johnston is the senior analyst and founder of ETF Database, a Web-based investment resource providing actionable ETF investment ideas and an ETF Screener for investors analyzing potential ETF investments. Johnston oversees ETF Database's free ETF Newsletter, one of the most popular sources for news and commentary focusing exclusively on the exchange-traded fund industry. Johnston also maintains and develops content for ETFdb Pro, a line of analyst reports and model portfolios designed to help investors utilize ETFs to meet their investment goals.

Johnston has completed the Chartered Financial Analyst (CFA) program, and obtained his bachelor's degree in finance from the University of Notre Dame. Prior to founding ETF Database, Michael worked in a private client service group performing valuations of companies operating in a wide range of industries.

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