Which of the 6 Agriculture ETFs is Best?

The Wall Street Journal has a great article out (sub. req.) regarding the recent run up in the prices of agricultural commodities. It makes the point that as the US and other countries search for alternative fuel sources, one of the areas it turns to is the grains. Corn, soybeans, and wheat have all hit new historic highs recently and sugar is at a 52-week high.

In essence we are using our sources of food as a means to fuel our cars and generate energy. There is only so much land that can be used for farming and with the growing demand for food from emerging countries such as China, the supply will not be ample. Then there are wildcards such as weather that can greatly affect the supply. Recent issues in Australia and the Ukraine have hurt the supply of wheat, pushing the global stocks to multi-decade lows and sent the price soaring as demand continues to surge.

To play the agricultural boom, investors could either buy directly into the futures or turn to a handful of ETFs that are now on the market. There are 6 ETFs that will give investors exposure to the agriculture futures.

PowerShares DB Agriculture ETF (DBA) – The ETF has been around a little over one year, the most of any of the ETFs on this list. Four equally weighted commodities make up the base allocation for DBA: corn, soybeans, sugar, and wheat. The expense ratio for all ETFs on the list is 0.75%. DBA is the most liquid of the ETFs by far, but the concentration in only 4 commodities does put the risk at above average.

iPath Dow Jones AIG-Agriculture ETN (JJA) – The ETN is a little more diverse than DBA, with 7 commodities. The largest allocation is in soybeans (31%), followed by wheat (20%), and corn (16%). Since it began trading in October 2007 the ETN is up 28% versus a gain of 36% for DBA. The liquidity is more than enough for investors and the only issue is 1/3 of the ETN in one commodity, soybeans.

ELEMENTS Linked to the Rogers International Commodity Index – Agriculture ETN (RJA) – For starters, do you think they could have come up with a longer name for their ETN? Second, keep in mind this is an exchange-traded note [ETN], versus and ETF. Most investors will never know the difference and I will not go into the intricacies in this article. RJA is the most diverse of the group, with 20 different agriculture commodities represented. The top holdings include: wheat (20%), corn (14%), cotton (12%), and soybeans (9%). With more diversity among commodities, the upside potential will be less than the previous two ETFs, but the downside will also be less. For example, the ETF is up only 20% in the same time frame as the other two above, thus lagging. During the one-week pullback in mid January of the agriculture ETFs, DBA lost 9%, JJA 7%, and RJA was only down 5%. This ETF is perfect for the more conservative commodity investor.

iPath Dow Jones AIG-Grains ETN (JJG) – The grains are considered a sub-sector to the agriculture and consequently there are not nearly as many to choose from when building a grains ETN. JJG is composed of only 3 commodities: soybeans (46%), Wheat (30%), and corn (24%). Recently it has been okay to be concentrated on three very hot commodities; since late October the ETN is up 31%. The two problems with JJG are the low average daily volume resulting in large spreads and the risk of being over concentrated.

ELEMENTS Linked to the MLCX Grains Index ETN (GRU) – The newly introduced ETN from the company that brought you RJA began trading this week and has yet to bring in the volume needed to get rolling. That being said, it is an alternative to JJG because it offers a similar strategy. The major difference is where the money is allocated. The top holdings are: wheat (47%), corn (36%), soy meal (10%), and soy beans (8%). If wheat is your game, go with GRU. If soybeans get you more excited, JJG is there for you.

ELEMENTS Linked to the MLCX Biofuels Index ETN (FUE) – This ETN may not sound like it should be included in this list, but after I share with you the allocation you will understand. The top holdings are: soybeans (32%), sugar (25%), corn (21%), and soy bean oil (13%). FUE is very new as well and has yet to attract the volume and therefore spreads could be an issue. Other than that, the one issue I have with FUE is the absence of wheat. Because wheat is not considered to be used in biofuels it is not included. I want to have exposure to wheat, therefore choose one of the other five candidates.

Disclosure: None

Editor: See also our complete listing of Commodity ETFs and ETNs, including links to recommended reading.

Comments

[bgdreamz:]

Why not include MOO? It has a very good diverse group of holdings. Also nobody seems to carry much if any cotton - cotton will be big as field sizes have diminished because of the overwhelming corn amount of corn these days.

2008 Feb 15 08:18 AM

[R. Richard ...:]

Note you called RJA "this ETF" at the close of that paragraph. it is an ETN issued by Swedish Export Bank.

It would be interesting to know how that bank covers its reserve liability for those Notes, such as owning a certain % of actual contracts (or maybe not) I would think a "prudent" bank would alawys hold some part of its reserves in the actual contracts.

How can we find out?

The reason not to include MOO is that it is a "businesses" (MON., POT, etc.) index base not "stuff."

There are indexs that contain cotton. %s are smaller, but you are right and the production will be moving to the LDCs

2008 Feb 15 08:45 AM

[hugoh:]

An interesting title but hardly correct. Perhaps "An Overview of the Ag ETFs/ETNs" would be more appropriate.

2008 Feb 15 12:57 PM

[Index Maven:]

Starting next week you will have a new choice for agg exposure (as well as overall commodities). The new line of Opta ETNs (provided by Lehman Brothers) will begin trading next week. Their Agg offering (ticker: EOH) has eight commodities (74% grains and 26% softs) -- heavy in Soybeans and Suger. Moreover, this agg offering uses an intelligent roll mechanic to capture positive roll yield.

2008 Feb 15 01:06 PM

[Internet2k4:]

Just ran a 6 month chart of what's mentioned in the article with MOO (which has been on my watch list without dipping a toe yet) - DBA and MOO show as the current best bets in a pretty hot market, with DBA less volatile as a "long" and MOO the volatile trading preference. Does anybody have a clue about how these might perform in a recession?

2008 Feb 15 02:18 PM

[TrevTones:]

Why did you leave out GCC, the GreenHaven ETF? It's got 17 commodities: wheat, corn, soybeans, live cattle, lean hogs, gold, silver, platinum, copper, cotton, coffee, cocoa, orange juice, sugar, crude oil, heating oil, and natural gas. And I love the balance weighting they have. Check it out at GreenHavenFunds.com. I bought it because I like the fundamentals of all 17 and especially like the way it is weighted. Also it is the only place I could find livestock and lean hogs, which is at very low supply levels, just at time when China is now beginning to eat meat at an accelerating rate.

2008 Feb 16 02:02 AM

[Matthew D. ...:]

Good question, the reason I omitted GCC is because all 6 ETFs above concentrate strictly on agriculture. Also, if you want a pureplay livestock ETF there is the iPath Dow Jones-AIG Livestock ETN (COW) that invests 62% in cattle and 38% in hogs.

To comment on a previous question, referring to RJA as an ETF was merely a typo.

2008 Feb 16 09:59 AM

[oilsands:]

Thanks, Mat and commenters. Internet 2k4 we are in a recession. But eve if you want to blieve that something else has to happen to prove that, the answer to your query is that these should do fine in a recession. Besides, the world market is powering these commodities.
One note, Chinese folks eat even more pork per capita than Americans, and they had to destroy a large per centage of their herd due to disease, so there will be great price pressure on that commodity.

2008 Feb 16 11:21 AM

[R. Richard ...:]

Another thing to consider in many of these indices and their constructions are the issues of distribution and costs of distribution of the good (product); as opposed to less complex estimates of the mere growth and changes in demand for a "pure" ag item.

2008 Feb 16 11:51 AM

[David Jackson:]

It would be helpful to hear more about which commodities to own and why. Ethanol, for example, makes more economic sense when generated from sugar than corn.

Matt, you said you wanted exposure to wheat. Can you elaborate?

2008 Feb 16 04:22 PM

[Marty From ...:]

Anyone know how to confirm that both China and Russia have reverse tariffs on their wheat?
Which of the ETFs or ETNs have the most cotton exposure?
Which fund comes closest to the Roger's Raw Materials Fund?
An ethanol plant under construction near Casselton, N.D. will require about 400 square miles of corn to keep it running efficiently.

2008 Feb 17 02:56 PM

[ashley 47:]

Matt

Have you also considered DBC? (AMEX -PowerShares Deutsche Bank Commodity index)
It has enjoyed enjoyed a great run since September 07

2008 Feb 17 09:42 PM

[Matthew D. ...:]

Ashley - DBC is a solid broad-based ETF that has over 50% in energy (oil and heating oil). The exposure to ags is only 25% and is why it was not on the list.
Matt

2008 Feb 18 08:37 AM

[Bruce Pile:]

Could you explain the difference between an ETF and the ETN? As I understand it, it is a "note" or some kind of debt instrument similar to a bond. As such, could it get caught up in the credit mess?

Crop investing has always been perilous because a shortage in any one crop has always been fleeting. There was always the option of sacrificing other crops to dissolve the shortage. Then along came peak oil and mandated ethanol plant buildout. Now fuel crop production is pushing all the crops into a shortage to make room for the energy gap. So all these commodity "plays" are really a play on just one commodity - oil. The bottom line is that the growing shortage of oil will induce a fuel crop buildout that will far exceed any attempt to stretch the arable land available for crops. And the low ER0EI corn craze will ensure no effective easing of the oil shortage untill cellulosic and newer forms of high EROEI designer ethanols come out of the lab. That's not going to happen for years. Untill then, fuel crops can mushroom out of control alongside the oil shortage. There is an excellent oildrum.com post by Stuart Staniford on the explosive growth physics of fuel crops. Just click on his profile and go to the list of stories by him. It's the Jan. 7 agri piece.

2008 Feb 20 03:16 PM

[Crazylegs:]

I enjoyed your article and found it very informative. I tried to find out all the 20 different commodities that RJA invest in and could not find anything. I see you list wheat, corn, cotton and soybeans. How can I find out what the other 16 are? I went to several different investment web sites and could not find their holdings.

2008 Feb 23 09:48 AM

[bear_mkt:]

Great summary, Matthew. To BrucePile -- ETF vs. ETN simply: an ETF holds "things" such as gold or contracts, an ETN is a promise to pay. So, Bruce, you are right, an ETN is a debt instrument and you do have a credit risk in addition to a commodity risk. One more item to note: There have been recent IRS changes in the tax treament of ETNs, such as Barclay Bank's single currency ETNs. Once you decide where you want to invest, you should look at the tax implications of ETNs. Just my opinion.

2008 Feb 26 03:05 AM

[Cygnusx3:]

Some very good questions. I, too, have been looking for the composites of the Rogers' Index - can't find a thing - not even in the prospectus.

2008 Mar 09 04:57 PM

[slippingsloth:]

Maybe I am just lucky because I found this for RJA on my first google search.

www.elementsetn.com/pd...

The link should answer your RJA components question.

2008 Mar 15 05:33 AM