A Guide to Agricultural and Industrial Commodity ETFs and ETNs

Agricultural Commodity ETFs and ETNs

Unleveraged Mixed Agricultural Commodity ETFs and ETNs

• E-TRACS UBS Bloomberg CMCI Agriculture Index ETN (UAG)
• E-TRACS UBS Bloomberg CMCI Food Index ETN (FUD)
• iPath Dow Jones-AIG Agriculture Subindex Total Return ETN (JJA)
• iPath Dow Jones-AIG Grains Subindex Total Return ETN (JJG)
• iPath Dow Jones-AIG Livestock Subindex Total Return ETN (COW)
• iPath Dow Jones-UBS Softs [coffee, cotton and sugar] Subindex Total Return ETN (JJS)
• MLCX Biofuels Index ELEMENTS ETF (FUE)
• MLCX Grains Index ELEMENTS ETF (GRU)
• PowerShares DB Agriculture Fund ETF (DBA)
• Rogers International Commodity Index – Agriculture ELEMENTS ETN (RJA)

Single Agricultural Commodity ETFs and ETNs

• E-TRACS UBS Bloomberg CMCI Livestock Index ETN (UBC)
• iPath Dow Jones-UBS Cocoa Subindex Total Return ETN (NIB)
• iPath Dow Jones-UBS Coffee Subindex Total Return ETN (JO)
• iPath Dow Jones-UBS Cotton Subindex Total Return ETN (BAL)
• iPath Dow Jones-UBS Sugar Sub-Index Total Return ETN (SGG)

Industrial Commodity ETFs and ETNs

Unleveraged Mixed Industrial Commodity ETFs and ETNs

• E-TRACS UBS Bloomberg CMCI Industrial Metals Index ETN (UBM)
• iPath Dow Jones-UBS Industrial Metals Subindex Total Return ETN (JJM)
• Rogers International Commodity Index – Metals ELEMENTS ETN (RJZ)
• PowerShares DB Base Metals Fund ETF (DBB)

Single Industrial Commodity ETFs and ETNs

• iPath Dow Jones-UBS Aluminum Subindex Total Return ETN (JJU)
• iPath Dow Jones-UBS Copper Subindex Total Return ETN (JJC)
• iPath Dow Jones-UBS Lead Subindex Total Return ETN (LD)
• iPath Dow Jones-UBS Nickel Subindex Total Return ETN (JJN)
• iPath Dow Jones-UBS Tin Subindex Total Return ETN (JJT)

Agricultural and Industrial Commodity Related ETFs and ETNs

• Claymore Global Timber ETF (CUT)
• PowerShares Global Coal Portfolio ETF (PKOL)
• Van Eck Market Vectors Agribusiness ETF (MOO)
• Van Eck Market Vectors Coal ETF (KOL)
• Van Eck Market Vectors Steel ETF (SLX)
• Van Eck Market Vectors RVE Hard Assets Producers ETF (HAP)

Discontinued Agricultural and Industrial Commodity ETFs and ETNs

• MLCX Livestock ELEMENTS ETN [LSO]
• Opta Lehman Brothers Commodity Index Pure Beta Agriculture Total Return ETN [EOH]

What Are They?

• The unleveraged commodities ETFs (exchange traded funds) attempt to track the price of the commodity by holding the actual commodity in storage, or by purchasing futures contracts. Because futures provide leverage (more exposure than the actual cash invested), ETFs that use futures contracts have uninvested cash, which they usually park in interest-bearing government bonds. The interest on the bonds is used to cover the expenses of the ETF and to pay dividends to the holders.
• The ETNs (exchange traded notes) are non-interest paying debt instruments whose price fluctuates (by contractual commitment) with the price of the commodity. In other words, with the ETN you don’t actually own the commoditry, but a promissory note to pay you based on the commodity’s price. Because they are debt obligations, ETNs are subject to the solvency of the issuer.
• The Agricultural and Industrial Commodity Related ETFs and ETNs don’t track the commodities. Instead, they are a basket of stocks related to production of the commodity in question. Since the stocks are impacted by the price of the commodities, they are another way to gain exposure to them. However, commodities related stocks are also impacted by production costs, such as energy costs, and company-specific risk. So they may turn out to be poorly correlated with the price of the commodity.

Why & How To Use Them

• Commodities are a separate asset class from stocks and bonds, so they provide extra diversification in a portfolio.
• The case for agricultural and industrial commodities: Economic recovry, population growth and global economic development may lead to rising commodity prices.
• The case against: In contrast to stocks and bonds, commodities are not income generating. So ownership of the ETFs or ETNs is a pure bet on prices. And the expenses charged by the ETF and ETN providers, including the cost of storing and insuring the commodities or managing the futures, eat away at the underlying value of the fund. Morever, in the past, commodity prices have underperformed the stock and bond markets for extended periods.

What to Look Out For

• Long ETFs that use futures have diverged significantly from the price of the commodities themselves. ETNs, in contrast, track the price of the commodities closely. See the articles in the Further Reading section below.
• There are dramatic differences in structure of the long ETFs and ETNs, even for the same commodity, leading to potential differences in performance and tax treatment.
• Leveraged ETFs and ETNs are far riskier than simple long ETFs and ETNs. Their performance is often not what investors expect – see under Further Reading below.
• ETFs and ETNs are treated differently for taxation purposes. Current opinion is that all gains on ETNs held for longer than one year are treated as long-term capital gains, whereas an investor owning a futures-based ETF is taxed on any capital gains on the underlying futures held by the fund using the taxation convention for futures, ie. at a hybrid rate of 60% long-term, 40% short-term each year on all gains, even if the investor doesn't sell the fund. (Check this carefully with your accountant.)

Further Reading

• The underperformance of futures-based commodity ETFs relative to the actual commodity they are supposed to track, known as tracking error, is discussed in US Oil Fund ETF Fails Investors Consistently (Scott Rothbort). For the case for commodity ETNs over commodity ETFs, see Troubled By ETF Tracking Failures? Try ETNs (Richard Shaw) and Kevin Rich on Commodity ETFs and ETNs (Hard Assets Investor). See also The ETN Market Heats Up With Goldman Launch; More On the Way (Matt Hougan).
• For analysis and discussion of the agricultural commodity ETFs and ETNs, see: Agriculture ETFs: DBA vs. JJA (Michael Johnston) and Which of the 6 Agriculture ETFs is Best? (Matthew D. McCall).
• For further analysis and discussion of these commodity ETFs, see: iPath Doubles Offerings With Eight Commodities ETNs (Index Universe), ELEMENTS Expands ETN Offerings to Livestock, Precious Metals, Climate Change (Heather Bell).

This page is part of The Seeking Alpha ETF Selector which sorts ETFs by type, highlights how to use them and what to look out for, and provides links to articles that discuss key issues for investors.

Comments

[optionsgirl]

This is a really good article that clearly explains the differences and issues with commodity related etf's and etn's. Anyone interested in purchasing these funds should use this as a springboard for further DD.

2009 Nov 18 04:13 PM

[doubleguns]

OG, Talk about getting an education!

What is the link to the 7 steps for protecting for an economic collapse. There were a few ETFs in there that looked interesting using a mix of metals, ag and energy. The 3 kiings in my book.

2009 Nov 18 04:49 PM

[Jabalong]

Good article, though I'd just point out that some of the reading is old, so liable to be outdated particularly in light of new and evolving rules on position limits in the US.

2009 Nov 20 07:50 AM