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TheStreet Open House

Top 10 Agricultural Commodity ETFs

 

Before DBA was launched, there wasn't an opportunity for investors (retail, FA and institutional) to invest directly in agricultural markets without using futures or options. New agricultural ETFs and ETNs have now made it possible to invest in these markets without the leverage and complexity associated with commodity futures markets.

Previous complexities included having separate commodity accounts, margin agreements, contract rollovers, option premiums and expiration dates. Agricultural markets can be seasonal and are affected by a multitude of exogenous forces--including the dollar since all commodities are priced in dollars.

Other factors include planting issues, crop diseases, frost, floods, heat and climate issues in general. Having unleveled exposure to commodity markets allows investors to participate and protect themselves from rising food prices. It also allows investors the opportunity to understand about how these markets operate, affect their daily lives and how they can make money.

ETFs like DBA, which allow you to invest in a wide variety of agricultural commodities including grains, meats, softs (coffee, sugar, etc.) and cotton. Subsequent to the launch of DBA, other agricultural ETFs have been issues which have allowed investors to invest directly in specific agricultural commodities. This allows investors the ability to target markets which they're particularly interested in.

There are also a select group of inverse ETPs available which allow you to speculate on downward price movements in the entire agricultural commodity market. Commodity markets exist to either be long or short and are unique in that regard.

With inflation pressures waxing and waning many believe it's important to have exposure to direct agricultural commodities. Why? Commodity markets often feature noncorrelated performance with conventional portfolios. Further when prices of foodstuffs are rising it makes sense to be able to profit or even hedge against these events. This naturally would include other commodity ETF/ETN products that have come to market directed toward metals, energies and currencies. We've cobbled some good choices together and where repetitive choices exist we've paired some together with similarities just too hard to ignore.

As a former CTA (Commodity Trading Advisor) and CPO (Commodity Pool Operator) I know the value of having an allocation of most portfolios to the commodity sector. These provide increased diversification opportunities for any portfolio. After nearly 40 years of seeing these positive effects during a variety of market conditions, I know first-hand their benefits. 

Four other risk factors should be considered:

·         The CFTC's varying considerations regarding commodity position limits as applied to the assets of ETF and ETNs is still in limbo.

·         The credit quality of ETNs given these are "notes" many guaranteed by Barclay's and Deutsche Bank.

·         Backwardation (back month contracts lower than front month) and Contango (back months higher than front month) can negatively affect contract rollover for investors.  

·         Since most commodities trade in dollars, the value of the dollar can positively or negatively affect performance.

Deutsche Bank features inverse and leveraged long ETNs for those investors wishing to hedge or speculate.

Since most of the issues feature different agricultural commodities it becomes a more difficult task to rank one higher than another. Although we may use some of these in ETF Digest portfolios it's not our intention to recommend one over another at this time.

Our proprietary stars ranking system is outlined below. If an ETF you're interested in is not included but you'd like to know a ranking send an inquiry to support@ETFDigest.com and we'll attempt to satisfy your interest.


Strong established linked index
Excellent consistent performance and index tracking
Low fee structure
Strong portfolio suitability
Excellent liquidity


Established linked index even if "enhanced"
Good performance or more volatile if "enhanced" index
Average to higher fee structure
Good portfolio suitability or more active management if "enhanced" index
Decent liquidity


Enhanced or seasoned index
Less consistent performance and more volatile
Fees higher than average
Portfolio suitability would need more active trading
Average to below average liquidity


Index is new
Issue is new and needs seasoning
Fees are high
Portfolio suitability also needs seasoning
Liquidity below average

Our previous technical analysis methodology involved using evaluating monthly charts commodity markets must be viewed with shorter time horizons. This is due to obvious increased volatility but also due to the peculiar nature with which underlying commodity contracts trade. Some contracts expire monthly and others quarterly. Some have serious seasonal characteristics inherent with agricultural issues such as growing seasons, weather and disease. Therefore, it pays to be more active and utilize a combination of weekly and daily charts to manage risk. We utilize many indicators to evaluate technical conditions including the 22 period weekly moving average. When prices are above the moving average, stay long, and when below remain in cash or short. Some more interested in a fundamental approach may not care so much about technical issues but I've rarely met a successful fundamental commodity trader. Premium members to the ETF Digest receive added signals when markets become extended such as employing DeMark triggers to exit overbought/oversold conditions.

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