Are Agricultural ETFs Immune to the Current Crisis?

Includes: DBA, JJG
by: Gary Gordon

ETF Securities is a London-based exchange-traded fund provider that primarily deals with commodities. They have gone from a "no-namer" to Europe's largest ETF provider with roughly $10 billion+ in assets.

Not so surprisingly, then, when ETF Express reported that ETF Securities benefited from record inflows of $580 million, the news piqued my interest. Apparently, agricultural products joined physical gold and oil on the desirability list for exchange-traded commodity funds.

Gold received the lion's share... 60% of new money, in fact. Whether a fear of fiat currency failure or hyperinflation, gold's shine hasn't been all that surprising.

Yet agriculture hadn't been a noticeable source of growth in the commodity ETF world. At least not until the week ending 1/23/09.

Indeed, the inflow into agricultural ETFs was the largest since April of 2008 for ETF Securities. Is the renewed interest related to a notion that agriculture supply and demand are unrelated to the global financial crisis? Perhaps. However, agriculture ETFs may also have a place as a hedge against food price inflation.

Then there are other possibilities. For example, some measures show agriculture commodity storage is near historic lows. Moreover, planting in North America has been reduced and weather in South America has been dreadful. Add up all of the factors and you may have a genuine supply concern going forward.

The current financial crisis does, however, present credit risk for exchange-traded notes (ETNs). And that makes it more worrisome to invest in things like the iPath DJ Grains ETN (NYSEARCA:JJG). The light volume also creates a wider bid/ask spread when buying or selling, making it more difficult for an investor to get a favorable price execution.

There is a simpler solution. The PowerShares DB Agriculture Fund (NYSEARCA:DBA) normally trades more than a million shares daily. And the performance across corn, wheat, soy and sugar is quite similar to a grains-only approach.

Agriculture etf dba grains etn

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.