Agricultural commodity ETFs provide exposure to food products
such as wheat, sugar, soybeans, livestock, hogs, and also raw
materials, such as cotton, timber, and wool. Water is also
sometimes included in agricultural portfolios.
Ownership of hard assets like commodities is especially
attractive when inflation threatens. Though most experts believe
that inflation is not yet here, recent CPI (Consumer Price Index)
and PPI (Producer Price Index) numbers have been higher than
expected. If these numbers continue moving upward, inflation is
certain and ownership of commodity ETFs will provide a hedge.
The benchmark agricultural commodity ETF is PowerShares DB
Agriculture (NYSEArca:DBA). DBA is a pure food products commodity
play. It holds futures contracts on corn, wheat, soybeans and
sugar. These contracts are rolled over before expiration to
maintain exposure. Another important futures-based ETF is
PowerShares Deutsche Bank Commodity Index (NYSEArca:DBC). DBC is
more diversified than DBA. It holds futures contracts in corn and
wheat. But it also holds significant positions in gold, heating
oil and crude.
The chart below compares DBA and DBC.
As the chart shows, over the last year DBA outperformed DBC.
This reversed the trend of the previous 12 months, when DBC led.
Over the last few years, energy has proved to be more volatile
than agricultural commodities and more correlated with equity
benchmarks.
Its not currently possible to buy either water or timber in
the futures markets. ETFs providing exposure to water and timber
own the companies handling the commodities rather than the
commodities themselves. In the case of Claymore/Beacon Global
Timber Index (NYSEArca:CUT), the first timber ETF, holdings are a
diverse group of companies, including Rayonier (
RYN
) a financial REIT and major cellulose producer, and MeadWestvaco
Corporation (
MWV
), a packaging and container company. CUT has significant
overseas holdings.
In the case of water ETFs, holdings tend to be technology
companies engaged in desalination, transportation, treatment,
etc. The best established water ETF, PowerShares Water Resources
(NYSEArca:PHO), for example, holds companies like FloServe (
FLS
), a flow control and equipment provider. PHO holds focused water
management companies like Veolia Environmental (
VE
). PHO also has its share of conglomerates, like Danaher (
DHR
), for which the water business is a fraction of overall
operations.
Though timber and water ETFs own a diverse group of companies
because pinpointing exposure to the commodity itself is
difficult, this is not necessarily a bad idea or poor investment
strategy. Historically, companies handling commodities have
significantly outperformed the commodities they handle. Commodity
appreciation has also grown far more slowly than manufactured
goods, and on greater volatility.
The chart below compares the futures-based benchmark DBA with
the Market Vectors Global Agribusiness ETF (
MOO
), a fund which holds companies handling corn, wheat,
agricultural management.
Prices for commodity tend to erode as technological innovation
makes production more efficient. As farming improves commodities
become cheaper to produce. Technology also produces synthetics
with lower prices and less volatility compared with commodities.
Relative appreciation of commodities is also important (for
example if corn prices increase then land planted with soybeans
can be used to grow corn, depressing corn prices).
But in an inflationary scenario, the most important
consideration is the commodity as hard asset. Inflation means
that commodities cost more. Inflation happens to commodities.
Ownership of agricultural commodity ETFs can be a good way to get
on the right side of an inflation trend.
A list of Agricultural Commodity ETFs and expense ratios
follows:
FUTURES BASED
FUTURES BASED
GreenHaven Continuous Commodity Index Fund (
GCC
), 0.85%
iShares GSCI Commodity-Indexed Trust ETF (
GSG
), 0.75%
PowerShares DB Agriculture (NYSEArca:DBA), 0.75%
PowerShares DB Commodity Index Tracking Fund (
DBC
), 0.75%
AGRIBUSINESS
AGRIBUSINESS
Market Vectors Global Agribusiness ETF (NYSEArca:MOO),
0.58%
WATER
WATER
PowerShares Water Resources (NYSEArca:PHO), 0.64%
PowerShares Global Water (NYSEArac:PIO), 0.75%
Claymore S&P Global Water (NYSEArca:CGW), 0.70%
First Trust ISE WATER INDEX (NYSEArca: FIW), 0.60%
TIMBER
TIMBER
Claymore/Beacon Global Timber Index (NYSEArca:CUT), 0.95%
iShares S&P Global Timber & Forestry Index
(NasdaqGM:WOOD), 0.48%
SHORT/LEVERAGE
SHORT/LEVERAGE
ProShares Ultra DJ-AIG Commodity ETF (
UCD
), 0.95%
ProShares UltraShort DJ-AIG Commodity ETF (
CMD
), 0.95%
Jonathan
Bernstein
has been writing about ETFs since 2003 and is the author of
Sector Trading: A Year in Exchange Traded
Funds
.
Jonathan
Bernstein
has been writing about ETFs since 2003 and is the author of
Sector Trading: A Year in Exchange Traded
Funds
.
Jonathan
Bernstein
Sector Trading: A Year in Exchange Traded
Funds