Agriculture and Commodity ETFs/ETNs

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 ETN 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 ETF (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 ETF (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.

Lehman Opta ETN (EOH): eight commodities (74% grains and 26% softs), heavy in Soybeans and Suger.

DJAIG Live stock ETN (COW): invests 62% in cattle and 38% in hogs

 (MOO):

GreenHaven ETF (GCC): 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.
( http://www.GreenHavenFunds.com)

Powershare Deutsche Bank Commodity Index (DBC): a solid broad-based ETF that has over 50% in energy (oil and heating oil). The exposure to ags is only 25% .