Michael Johnston wrote an ETF Profits story about sinking your teeth into FUD, the UBS E-Tracs CMCI Food Total Return Fund (FUD). It's a great piece, and the FUD is a great product.
Unfortunately, however, FUD has some negatives. As much as I love FUD, not everyone can work it into their investment strategy.
First, the good news. I love FUD's underlying strategy. Its index -- the UBS CMCI Food Total Return Index -- tracks a diversified portfolio of food-related commodities and has an excellent roll strategy that does a good job minimizing the potential drag of contango on the portfolio. As an index, it's best of breed.
But investors don't buy an index, they buy a product. And that's where one can run into issues. The truth is that FUD trades very thinly. According to Arcavision, the average spread for FUD so far this year has been $0.28 per share. With the fund trading around $30 per share, a 1% fee is charged every time an investor moves into and out of the product.
ETF fans will jump up and down and tell you that the public spread on ETFs and ETNs does not reflect the true liquidity of the product. Because investors can always create more shares of an ETF, there is much more liquidity than one sees on the screen. The liquidity of the ETF, they'll say, is determined by the liquidity of the underlying.
Which is true -- if you're a huge investor.
The problem with the underlying liquidity story is that it only applies if you are trading a large amount -- let's say, 10,000 shares, 20,000 shares or, more realistically, 30,000 shares. If you're only trading 1,000 shares, you're stuck with what you see on the screen, which, in this case, means you'll be stuck paying 1% when you buy FUD and hit with another 1% when you sell; and, most investors are probably in the plus-or-minus-1,000-shares camp, I'd guess. After all, that's a $30,000 position in FUD, which is a pretty hefty holding, given that FUD would likely be a small slice of even the most aggressive portfolio.
So, where should retail investors turn if FUD doesn't move enough for them? Consider the
iPath Dow Jones-UBS Agriculture Total Return Sub-Index ETN
The two funds have remarkably similar holdings: JJA holds almost 25% corn, while FUD has 19% corn; JJA has a 25% weight in soybeans, and FUD has 19% exposure to soy. JJA isn't a completely pure food play -- it holds almost 9% in cotton -- but it's pretty close.
More important, JJA is far more liquid. JJA has $160 million in assets to FUD's $11 million and it trades at an average spread of 0.19% vs. 0.96% for FUD. That means an investor saves almost 80 basis points for every trade.
Yet, the two products are hyper-correlated. A look at returns over the past two years shows nearly identical performance.
It's a shame that FUD's spreads can hurt smaller investors. It's a great product and I hope it attracts the liquidity to be draw the attention of noninstitutional investors. But until it does, JJA may be an appealing substitute.