By Christian Magoon
Breakfast is a unique meal because the same foods are routinely consumed by Americans. These "staples" have the classic investment characteristics of constant demand and supply uncertainties. Many investors forget these "soft" commodities however and focus on the "hard" commodities like gold and silver when investing. Unfortunately 2012 has shown that failing to have a little breakfast in your portfolio can lead to a less diversified portfolio with lower returns. Let's examine soft commodities and several leading ETF and ETN products that provide convenient exposure to this unique market segment.
The drought of 2012 has created a tough year for farmers harvesting and raising breakfast related commodities. Breakfast commodities are generally defined as the eight commodities most often consumed at breakfast by Americans. They include:
- orange juice
Most of these staples have seen or are seeing significant price increases due to recent weather issues. These supply disruptions are creating higher prices for breakfast commodities and the related commodities and industries that use significant amounts of the breakfast commodities.
The ETFs and ETNs that focus on soft commodities are generally designed to track an index of commodity futures contracts. Indexes may focus on a single commodity like corn or may provide exposure to a basket of commodity contracts. For most investors, an index composed of a diversified basket of soft commodities is probably ideal. This option offers convenient portfolio diversification and generally incorporates some type of re-balancing mechanism. Some of the most popular soft commodity ETF and ETN products are from ETF sponsors and ETN issuers like iPath, PowerShares, Teucrium and ELEMENTs.
The largest breakfast or soft commodity ETF is the Powershares DB Agriculture ETF (DBA). It tracks an index focused on the most liquid agricultural commodities. Current top holdings include corn, soybeans, cattle, sugar and cocoa. Here's a chart from the DBA website illustrating the top 10 holdings. DBA has gained over 4% this year.
Another interesting way to access the space is through an ETN called the iPath Pure Beta Agriculture ETN (DIRT). DIRT tracks an index that dynamically allocates between nine different types of commodity futures contracts. This formula seems to have worked as DIRT has gained over 25% in 2012 while still being exposed to a variety of soft commodities. Here's the latest index allocation from the DIRT website.
Like stock investing, certain soft commodities may have better performance than others. For some investors who either already have a breakfast commodity allocation and want to overweight a market segment or for those that just want to be more speculative, there are single soft commodity ETFs and ETNs available. These products tend to be more volatile as they focus on just one segment of the market and in turn also carry the potential for higher returns and losses.
Taking a look at the top ten performing agriculture ETF and ETN products of 2012 (excluding leveraged products) reveals that six focused commodity products make the grade. Here's the top ten ranked by year to date performance via the Index Universe ETF data sort tool.
A quick comparison of the two best performing broad based agriculture products, DIRT and JJA, versus the S&P 500 ETF (SPY), the largest gold ETF (GLD) and 2012's best performing broad based commodity ETF (USCI), displays the unique return and diversification benefits soft commodity products may add to an overall asset allocation. Here's the comparison chart from the NASDAQ.com interactive chart center.
Going forward, most investors would be well served to make breakfast more than just a part of their morning routine. With rising populations, climate concerns and increased demands for protein rich food, soft commodities are sure to be in high demand. While summer drought has recently highlighted investment opportunities it appears that normal global growth will continue to fuel this under owned asset class for years to come.