Posted on 09 September 2011.
Prior to the evolution of the ETF industry, the only options retail investors had for gaining exposure to agricultural commodities were through stocks that are viewed as ag plays or through the risky futures market, a place that most ordinary investors are urged to stay away from due to volatility and excessive margin requirements. Needless to say, agricultural commodity ETFs have leveled the playing field.
And the timing could not be better for investors to take a look at agricultural commodity ETFs. Simply put, an expanding global population coupled with the rise of the affluent and middle classes in emerging markets has created increased demand for food, but supply issues have agricultural commodity ETFs looking like they could be on the cusp of a multi-decade bull market.
Put another way, there isn’t enough farm acreage in the world to accommodate global food demand today and the situation is expected to worsen in the coming years. Agricultural commodities like corn, soybeans and wheat are just like oil: They are deeply impacted by supply and demand dynamics and that has the spotlight on agricultural commodity ETFs.
The most important rule of thumb for investors to remember when it comes to agricultural commodity ETFs is that the ones that don’t track stocks, a prime example being the Market Vectors Agribusiness ETF (NYSE: MOO), are based on futures. Now this may seem to be a contradiction to one of the reasons to invest in agricultural commodity ETFs, which is to stay out of the futures market. Well, yes and no.
Beyond the aforementioned volatility and cost, the problem with the futures market is that you may be right about the direction of corn, coffee or sugar, but if that move doesn’t materialize before the contract you’re holding expires, you’ve got a losing bet on your hands. Since agricultural commodity ETFs trade like stocks, even though they hold various futures contracts, investors are not impacted by the time constraints of the futures market.
The other side of that coin is that since futures contracts for many agricultural commodity ETFs are purchased every month, these ETFs often feature higher expense ratios than traditional index or equity-based ETFs.
Not every product grown on a farm finds its way into becoming an exchange traded product. For example, there are no agricultural commodity ETFs devoted exclusively to orange juice or rice. Don’t fret. One of the best commodity-specific futures-based ETFs out there is the Teucrium Corn ETV (NYSE: CORN). CORN lets investors tap into the global food theme in a big way because corn itself is used in a variety of food products.
Not to mention corn is one of the most volatile commodities out there, making CORN, which has been a stout performer in a weak environment, a sound bet.
The PowerShares DB Agriculture Fund (NYSE: DBA) is a compelling agricultural commodity ETF because it offers exposure to a basket of commodities. Truly adventurous investors could take a ride with DBA’s double leveraged cousin, the PowerShares DB Double Long Agriculture ETF (NYSE: DAG). Conservative investors wanting to bet on their first agricultural commodity ETF should lean toward DBA or comparable basket funds.
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