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.