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
and we'll attempt to satisfy your interest.
Strong established linked index
Excellent consistent performance and index tracking
Low fee structure
Strong portfolio suitability
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
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
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
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.
Agricultural ETF (DBA)
follows the DBIQ Diversified Agriculture Index Excess Return which is composed of futures contracts on the most widely traded agricultural commodities. The fund was launched in January 2007. The expense ratio is .75%. AUM (Assets under Management) equal $2.1 billion and average daily trading volume is 1.3M shares. As of mid-December 2011 there is no cash dividend yield and YTD return is -13.50%.
Data as of December, 2011
DBA Top Ten Holdings & Weightings
Sugar #11(World) Jul12: 12.86%
Coffee 'c' Future Dec11: 12.11%
Cocoa Future Dec11: 10.95%
Live Cattle Futr Dec11: 10.91%
Corn Future Dec11: 9.48%
Soybean Future Nov12: 8.64%
Lean Hogs Future Dec11: 6.11%
Corn Future Mar12: 6.02%
Wheat Future(Kcb) Jul12: 5.76
Grains Total Return ETN (JJG)
follows the Dow Jones-UBS Grains Subindex Total Return which is an index composed of just three futures contracts in Soybeans, Corn and Wheat. The fund was launched in October 2007. The expense ratio is .75%. AUM equals $163 million and average daily trading volume is 129K shares. As of mid-December 2011 a dividend would be highly unlikely and YTD return was -2.30%.
Agriculture Sub-index ETN (JJA)
follow the Dow Jones-UBS agriculture Subindex Total Return Index which is composed of seven futures contracts on agricultural commodities. The fund was launched in October 2007. The expense ratio is .75%. AUM equal $134 million and average daily trading volume is 36K shares. As of mid-December 2011 the YTD return -21.00%.
Corn ETP (CORN)
follows the rollover of corn futures traded on the CME and by its structure is designed to give investors unleveraged exposure to corn futures contracts. The fund was launched in June 2010. The expense ratio is 1.42%. AUM equal $75 million and average daily trading volume is 95K shares. As of mid-December 2011 the YTD return has been -1.2%. The holdings consist of corn futures contracts which continually rollover.
Sugar ETN (SGG)
follows the Dow Jones-UBS Sugar Subindex Total Return Index which simply consists of one futures contract of sugar which is rolled over upon contract expiration. The fund was launched in June 2008. The expense ratio is .75%. AUM is $42 million and average daily trading volume is less than 37K shares. As of mid-December 2011 the YTD return was -12.09%.
Holdings consist of a rollover of sugar futures contracts.
Another market for your consideration is
(Barclays iPath Softs ETN) which follows sugar, coffee and cotton futures contracts in much the same manner as SGG alone. The fund was launched in June 2008. The expense ratio is .75%. AUM equals $24 million and average daily trading volume is less than 8K shares. As of mid-December 2011 the YTD return was -15.50%.
Cotton ETN (BAL)
follows the Dow Jones-UBS Cotton Subindex Total Return Index which is a single commodity consisting of rolling over one cotton futures contract. The fund was launched in June 2008. The expense ratio is .75%. AUM equal $45 million and average daily trading volume is 51K shares. As of mid-December 2011 the YTD return was -24.05%.
Holdings consist of a rollover of cotton futures contracts.
Rogers International Agriculture ETN (RJA)
follows the Rogers International Commodity Index-Agricultures Total Return which is an index of 20 agricultural commodity futures contracts and is a sub-index of the Rogers International Commodity Index. The fund was launched in October 2007. The expense ratio is .75%. AUM equal $45 million and average trading volume is less than 400K shares. As of mid-December 2011 the YTD return was -21%.
Coffee ETN (JO)
follows the Dow Jones-UBS Coffee Subindex Total Return which is another single commodity product investing in a single coffee futures contract which is continuously rolled-over. The fund was launched in June 2008. The expense ratio is .75%. AUM equal $26 million and average daily trading volume is less than 20K shares. As of mid-December 2011 the YTD return was -11.70%.
Holdings consist of rolling over coffee futures contracts.
#9: iPath Livestock ETN (COW)
follows the Dow Jones-UBS Livestock Subindex Total return which is currently composed of two livestock commodities--lean hogs and live cattle--which are traded and rolled over on U.S. exchanges. The fund was launched in October 2007. The expense ratio is .75%. AUM equal $110 million and average daily trading volume is 70K shares. As of mid-August 2011 the YTD return -5.00%.
Bloomberg Food ETN (FUD)
follows the UBS Bloomberg CMCI Food Index Total Return Index which provides direct exposure to a basket of 11 futures contracts from agricultural and livestock sectors. The fund was launched in April 2008. The expense ratio is .65%. AUM equal $40 million and average daily trading volume is less than 10K shares. As of mid-August 2011 the YTD return was -13%.
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Direct commodity related ETPs (ETFs & ETNs) are a good add to most portfolios contrary to conventional wisdom perhaps and a poor image. The key to this belief is that they're non-correlated generally to most conventional stock and bond portfolio allocations. For most investors it is probably best they consider an overall commodity tracking ETP which is representative of the entire complex.
It's also important to remember that ETF sponsors have their own competitive business interests when issuing products which may not necessarily align with your investment needs. New ETFs from highly regarded and substantial new providers are also being issued. These may include Charles Schwab's ETFs and Scottrade's Focus Shares which both are issuing new ETFs with low expense ratios and commission free trading at their respective firms. These may also become popular as they become seasoned.
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The ETF Digest has no current positions in the featured ETFs.
(Source for data is from ETF sponsors and various ETF data providers)
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.
Dave Fry is founder and publisher of
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