Commodities investing recently has gained a few new vehicles to allow more investors to get into the fold. Before the introduction of commodity-based ETFs and ETNs, an investor would choose between the cash market of a certain commodity or the futures markets, which facilitate the trading of derivative contracts based on the actual commodity. While ETFs and ETNs aren’t necessarily better plays, they’re easier for the average investor to digest.
The iPath Dow Jones-UBS Cotton Subindex Total Return ETN (NYSE:BAL) is an exchange-traded note created June 24, 2008, that matures June 24, 2038. This is a 30-year obligation that pays principal and interest, if any, based on the price of cotton. BAL uses cotton futures contracts that are fully collateralized with cash, and the excess cash is held in short-term Treasury Bills. This focused strategy has delivered the following returns as of Aug. 31, 2011.
- 1 month: 3.98%
- 3 months: -25.41%
- 6 months: -33.59%
- YTD: -10.74%
- 1 year: 55.85%
- 3 years: 14.74%
The limited history of BAL, as compared to the volatile price of cotton, does not give enough data to apply any reasonable conclusions on performance other than to avoid completely or to play only with house money.
The PowerShares DB Agriculture Fund (NYSE:DBA) uses a balanced approach to track an index of several agricultural commodities. Management chooses only the most liquid contract markets, which limits the fund’s options. The weighting and contract markets are listed in the table below.
- Feeder Cattle: 4.17%
- Cocoa: 11.11%
- Coffee “C”: 11.11%
- Corn: 12.5%
- Cotton #2: 2.78%
- Lean Hogs: 8.33%
- Live Cattle: 12.5%
- Soybeans: 12.5%
- Sugar #11: 12.5%
- Wheat: 6.25%
- Wheat, Kansas: 6.25%
DBA came into existence Jan. 31, 2007, and the returns based on this weighting as of Sept. 15, 2011, are listed below.
- 1 month: -2.56%
- 3 months: -0.4%
- YTD: -1.02%
- 1 year: 16.44%
- 3 years: 0.97%
The benefit of market diversification used by DBA is clearly identified, and having a position in this ETF might make a good choice for the long term. Agricultural markets are influenced by elements directly traced to simple supply and demand. But cyclical patterns of such elements do not measure well when compared to overall economic data. This enables DBA to be part of an investor’s portfolio that is not correlated to general equity and fixed income market conditions.
Lastly, the Teucrium Corn Fund ETF (NYSE:CORN) is a recent edition to meet the growing investor demand for exposure to agriculture. CORN — which, as expected, focuses on corn — has a complex structure. It consists of a commodity pool, which is placed in a trust, then shares are issued by the trust. Be wary of this one. The hidden costs of rolling futures contracts will erode the returns. Another concern is the lack of historical performance to make any assessment for investment purposes. See the limited returns below.
- 1 month: -6.54%
- 3 month: -1.17%
- Since inception: 68.54%
Because of CORN’s complex nature, regardless of performance and the outlook for the worldwide demand of corn, this program is best suited for investors that can accept a lot of risk and a lack of transparency.
Jeffrey L. Stouffer is the principal of Mercantile Capital Group, a Herndon, Va.-based introducing broker registered with the CFTC and a member of the National Futures Association. He can be reached at mercapitalgroup@aol.com. No direct or indirect holdings in any of these ETFs are owned.
