What investors should know about the opportunities and the risks

What is an Exchange Traded Fund?

An exchange-traded fund (ETF) is an investment fund composed of a basket of multiple securities. The asset classes within an ETF can include stocks, commodities, credit, fixed income, and other products for investors seeking a diverse approach to long-term growth. Like stock holdings, ETFs trade on the public equity markets.

Exchange-traded funds have become ubiquitous in the modern financial industry. These investments have grown from a niche product in the early 90s to competing directly with stocks, mutual funds, and even private equity funds today.

If you’re interested in portfolio diversification, one way to bolster your investment strategy is by introducing ETFs to your portfolio. Each ETF has a unique composition and assets under management, from basic index funds to thematic products with a particular purpose such as ETFs that focus on precious metals, commodities, agriculture goods, companies, and countless other niche areas.

In this guide, we explore the pros and cons of investing in ETFs in the agriculture space.

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Growth in the Exchange Traded Fund Sector

Looking at the underlying trends of ETFs provides details about the past performance of these funds, which may translate to market insights about potential future results.

According to data from Statista, the net asset value of worldwide ETFs is $10.02 trillion, with $5.45 trillion of these holdings in U.S. ETFs. Statista also notes that the sheer number of ETFs has grown by a staggering 3,000 percent from 2003, with more than 8,550 of these products in existence in 2022.

Benefits of Investing in ETFs

ETFs are popular among savvy investors for several reasons, including:

  • Ease of diversification with a single fund owning multiple securities
  • A high level of liquidity so you can cash out whenever you need to do so
  • Lower capital requirements than other custom and closed-end funds have
  • The tax efficiency of these products
  • The low cost of fees compared to other investments

In addition to these appealing characteristics of ETFs, you can easily invest in ETFs as if you were buying or selling stocks. Despite the low barrier to entry, ETFs are widely dominated by institutional investors, who generally are also active in the private equity business.

Liquidity is one of the biggest factors in choosing ETFs. More recently, central banks and investment companies, including the Federal Reserve, have begun dipping their toes into ETFs as well.

In March 2020, amid the coronavirus selloff, the Federal Reserve said it would buy bond ETFs in order to stabilize the financial system. Before selling off the position, the U.S. Federal Reserve held about $8.6 billion in corporate debt ETFs. The Bank of Japan is another high-profile central bank actively involved in the ETF market.

Diving Into Agriculture ETFs

Investors can choose from ETFs that invest in various agricultural goods and services. Some of the most common examples of assets you’ll find in an agricultural ETF include food and consumer staples, such as wheat and corn funds, farmland logistics, commodities, and companies that distribute and handle management in the agriculture business.

While all investing involves risk, niche ETFs, such as those that include agricultural land, have a low risk-to-return ratio. In general, agriculture ETFs do not strongly correlate to stocks or bonds, instead fluctuating with the prices of commodities such as wheat and corn.

Annual Return vs. Volatility

Types of ETFs for Agricultural Commodities

Investors who are interested in the agriculture sector typically have a choice of the following commodity ETF categories:

  • General ETFs: Broad ETFs offer exposure to a mix of underlying assets. Some of the big names include Invesco DB Agriculture Fund (DBA), Elements Rogers International Commodity Index-Agriculture Total Return ETN (RJA), and iPath Series B Bloomberg Agriculture Subindex Total Return ETN (JJA).

  • Livestock: These ETFs seek to mimic certain livestock futures, namely lean hogs and live cattle. iPath Series B Bloomberg Livestock Subindex Total Return ETN (COW) is the largest name in the space and invests in a combination of both lean hogs and live cattle futures.
  • Specific Crops: Crop ETFs allow investors to track the performance of agriculture crops such as wheat, corn, soybeans, coffee, and sugar; they include Teucrium Wheat Fund (WEAT), Teucrium Corn Fund (CORN), Teucrium Soybean Fund (SOYB) or iPath Series B Bloomberg Coffee Subindex Total Return ETN (JO)
  • Agribusiness: Lastly, investors who seek exposure to agribusiness stocks have the choice of picking ETFs such as VanEck Vectors Agribusiness ETF (MOO) or even the iShares MSCI Global Agriculture Producers ETF (VEGI). For example, many of these ETFs have holdings in companies such as Tyson Foods and Deere & Co.
livestock
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What Is the Best Agriculture ETF?

There is not a singular “best” agriculture ETF, as your specific risk tolerance and portfolio composition will be specific to your needs and future goals. Some portfolios may greatly benefit from agricultural commodity ETFs that track commodity prices for one specific crop such as wheat or corn, while other portfolios may benefit from a broad approach and should invest in agriculture goods across the marketplace.

When trading in agriculture ETFs for the first time, it may make sense to gain exposure to the major players in these markets.

Invesco DB Agriculture Fund (DBA)

This ETF is a popular way to provide exposure to a broad range of agricultural commodities for your portfolio. The fund seeks to track the DBIQ Diversified Agriculture Index by investing in 10 different commodity futures. This includes wheat, corn, soybeans, sugar, coffee, live cattle, cocoa, lean hogs, cotton, and feeder cattle. While this fund’s prospectus offers exceptional diversification in the agricultural commodity space, investors interested in this ETF should be aware of its relatively high 0.93 percent expense ratio.

Teucrium Wheat Fund (WEAT)

This commodity ETF offers exposure to just one type of commodity – wheat. WEAT focuses solely on futures contracts with a laddered strategy to protect investors from the inherent risk of investing in these commodities. According to U.S. News and World Report, this fund has increased in year-to-date value by 58 percent as of mid-May since Russia invaded Ukraine, as the latter is one of the world’s largest wheat sources. This fund also has a high expense ratio of 1.14 percent.

VanEck Vectors Agribusiness ETF (MOO)

This broad-based agriculture ETF tracks the MVIS Global Agribusiness Index, which follows the overall performance of companies involved in agri-chemicals, animal health and fertilizers, seeds, farm/irrigation equipment and machinery, aquaculture and fishing, livestock, as well as cultivation and trading of agricultural products. The fund has approximately $2.0 billion in assets under management and has an expense ratio of 0.56 percent.

Are Agriculture ETFs a Good Investment?

Portfolio diversification with an agriculture ETF can be a smart move in the current global economy. Inflation rates continue to rise as the already impacted international supply chain has slowed even further in the face of the Russia Ukraine war. Commodities and other consumer staples tend to hold steady even in historically challenging market conditions, so it’s possible the agriculture total return of an ETF can help your holdings hedge against inflation.

But before moving forward, you should get to know the commodity market conditions as well as factors such as the expense ratio of the fund you are investing in. You should also closely review the fund’s prospectus before investing so you fully understand the fund’s assets and top holdings, how the money will be invested, as well as associated costs such as management fees.

agricultural farmland
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Potential Downsides of Agriculture ETFs

While many investors are interested in ETFs that track physical commodities for their high liquidity and ease of access, some are dissuaded by low dividend yields. For example, investing in physical real estate, such as the farmland that produces the crops you are seeking exposure to, can provide higher yields. 

In addition, as ETFs are often limited to a specific range of assets within a given index, these funds can lack exposure to less well-known or emerging assets that can sometimes outperform the index. Past performance does not guarantee future results, a truism that creates challenges when the ETF management team makes investment decisions you can’t control. Another concern is that like other ETFs, the average expense ratio of the fund can often be high, reducing your overall return.

How Does an Agriculture ETF Compare to Other Options in the Global Economy?

As with any asset class, ETF investments provide different results based on current market conditions and your personal investing style. Many other types of funds compete with ETFs, most commonly stocks, mutual funds, and private equity funds.

Depending on economic conditions, different types of investment funds tend to behave differently. Studies show that amid recessions, private equity investments may outperform public equity investments. This report from E&Y also hints that PE firms prepared for the downturn resulting from COVID-19 well in advance of the true onset of the pandemic, and were well-prepared to capitalize on discounted assets.

ETFs, on the other hand, provide diversification over singular investments like stocks, but they do come with some of the risks mentioned above. Fortunately, there are other ways of investing in agriculture that can provide the unique benefit of strong performance during uncertain times. ETFs aren’t the only route if you’re interested in balancing your portfolio with agriculture-focused investments, and there is a strong case to be made for owning or investing in farmland directly to as a passive investment that is managed by experts.

When it comes to investing in agriculture ETFs, private equity, farmland, or any other product, the decision must come from the investor. You should have a firm understanding of the risk profile of any potential investment, along with a strong conviction in the investment and a clear view of the investment goal. Complete the online form below to connect with our team and explore the risks and rewards of agriculture investing and direct farmland ownership.

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