The agriculture segment is home to 10 funds, with a wide range of strategies and coverage that give investors the ability to fine-tune their exposure to suit their needs. Unfortunately,
“Unfortunately, most of the choices have few assets and poor on-screen liquidity” most of the choices have few assets and poor on-screen liquidity, so liquidity-conscious investors will see their selection set somewhat limited. Furthermore, there is a wide range of fees in the segment, so investors will need to weigh the perceived benefits of the exposure a product offers against the full cost of that exposure.
DBA is the clear standout when it comes to assets and liquidity, as its $1B+ asset tally is more than the rest of the segment combined by a large margin. With that big asset base comes the greatest liquidity in the segment, as more than $8M worth of DBA trades on a daily basis. DBA charges 96 bps a year, which is higher than its competitors—all but USAG charge less—but isn't out of line for the segment.
When it comes to exposure, the biggest difference among the 10 products in the segment is strategy and coverage. DBA—along with USAG, RGRA, FUD, RGRA and RJA—include livestock in their portfolios, a segment of the market excluded by our benchmark. How each fund goes about weighting and selecting contracts also varies, as there are consumption-weighted baskets (RJA, RJRA), production-weighted baskets like our benchmark (JJA), as well as methodologies using liquidity (FUD) or multifactor models (USAG) to weight contracts. There is also a wide range of strategies in the group for selecting which contracts within a commodity to hold, many of which aim to mitigate contango or profit from backwardation.
JJA is our Analyst Pick for the segment, as it represents classic, neutral exposure to the broad agriculture space. RJA earns a spot on our Opportunities List for its great liquidity and unique consumption-driven strategy that's designed by commodities legend Jim Rogers.
As an investor, the key is understanding how these different strategies impact your exposure to individual commodities and how they impact your expected returns. (Insight updated 10/20/17)
All Funds (9)
DBA $715.84 M 715838279.04602 Largest, most liquid choice
DIRT $1.84 M 1835718.3936 Few assets, poor liquidity
JJA $13.52 M 13523888.4686 Second easiest to trade
UAG $2.75 M 2746625.4 Expensive to access
FUD $3.93 M 3927899.5 Food commodities only
AGF $1.25 M 1252538.3136 Second generation product
TAGS $1.17 M 1168046.72 Illiquid and expensive
RJA $94.31 M 94311258.278147 Big asset base, strong volume
USAG $1.75 M 1752162 Expensive and illiquid
ETF.com Grade as 10/12/17
ETF.com Efficiency Insight
Unfortunately for investors, none of the 10 funds in the segment is particularly Efficient. Much of this has to do with the high costs on offer in the segment, as the cheapest product
“The difference in taxation between the two structures is great” (TAGS) charges 50 bps a year, while the most expensive fund in the segment (USAG) charges a considerable 321 bps. To make matters worse, all of the products in the segment have trouble tracking tightly, with many showing a high amount of relative volatility that produces a wide range of tracking differences over various 1-year holding periods.
Structurally, there is little variation in the group. Seven of the 10 products listed are ETNs, and the remaining three (USAG, DBA and TAGS), are commodities pools. The difference in taxation between the two structures is great, however, with ETNs getting stock-like tax treatment and the commodities pools getting blended 60/40 tax treatment—and marked to market each year. (It is worth noting that TAGS is essentially a fund of funds, holding four commodities pools that are rebalanced daily. This makes for a higher turnover portfolio.)
For the three commodities pools, 60 percent of any gains are taxed at the long-term capital gains (max 20 percent), and the remaining 40 percent is taxed at the investor's ordinary income rate (max 39.6 percent), regardless of how long the shares are held. This comes out to a blended maximum capital gains rate of 27.84 percent. Further, any gains made by the trust are "marked to market" at the end of each year and taxable to investors. This means your cost basis adjusts at year-end, and you can be subject to pay taxes on gains regardless of whether you sold your shares or received any distribution. For tax reporting, these three funds also generate a Schedule K-1 form, which can create an extra tax headache for the average investor not familiar with K-1s.
ETNs, on the other hand, do not generate a K-1. Long-term gains are taxed at the long-term capital gains rate, while short-term gains are taxed as ordinary income. (Insight updated 10/20/17)
ETF.com Tradability Insight
The clear standout in Tradability is DBA. The fund attracts more than $8 million in volume most days and its spreads—about 4 bps on average—are less than 1/2 those of its
“The clear standout in Tradability is DBA.” closest competitor. Anyone looking to trade with any regularity will have few, if any, options outside of DBA.
The next two most liquid funds in the segment—RJA and JJA—are still a cut above the rest of the segment. Spreads average 15 and 11 bps, on median volume of around $1M and $250K, respectively. While those numbers may not inspire high confidence, in the context of the segment, they are exemplary.
The remaining funds trade less than $25K daily, often far less. Two funds (USAG and DIRT) don't trade at all most days. Those paltry volume statistics accompany wide bid/ask spreads that range from 36 bps (FUD) all the way up to hundreds of bps wide. In other words, use extreme caution when trading these funds and never use market orders. If you happen to place a market order during intraday liquidity troughs, you risk getting filled far away from fair value.
There are more options at the institutional level, as all but one fund get perfect scores on our block liquidity measurement (AGF is closed to creations, and so is not scored). That said, it makes sense to shop around among different liquidity providers and market makers to find the best execution, as not every firm on the street will be willing to execute orders smaller than a creation unit. (Insight updated 10/20/17)
ETF.com Fit Insight
There are two major decisions to make when selecting a fund in the agriculture segment.
The first is whether to include livestock. If you believe—as our segment benchmark
“many will simply choose DBA for its size and liquidity.” does—livestock commodities like lean hogs and cattle do not belong in an agriculture portfolio, then you have four choices: JJA, DIRT, AGF and TAGS.
The second deals with weighting and contract selection. Whereas JJA—like our benchmark—tracks front-month futures contracts weighted by production, all other funds in the segment take a more nuanced approach. JJA's largest weighting is to soybeans and its derivatives, with corn, sugar, wheat and cotton rounding out the top five.
By contrast, DBA's index combines production and open interest to determine its weighting, then overlays a contango mitigation strategy to select the contracts it holds on each commodity. In addition to its 25% weighting to livestock, DBA's portfolio is more balanced in its exposure to agricultural commodities, with no single commodity representing more than 20% of the index.
RJA's index tracks front-month futures like our benchmark, but the combination of a consumption-based weighting scheme and inclusion of livestock gives corn and wheat a hefty haircut. RGRA also includes livestock but uses a methodology developed by Jim Rogers based on his view of "economic importance". The portfolio also includes lesser-followed agricultural commodities like lumber and rubber.
DIRT, like RGRA, is a second-generation product that chooses contracts based on the futures curve shape in an effort to mitigate contract decay. DIRT differentiates itself by weighting commodities based on liquidity—rather than production or consumption—giving soybeans and their derivatives a huge boost.
For a more concentrated take on the agricultural commodities market, AGF and TAGS are worth a look. AGF tracks just four commodities: corn, wheat, sugar and soybeans, and chooses its contracts based on the futures curve shape, which—combined with the narrower scope—lowers its Fit to our benchmark. TAGS, however, holds four second-generation agricultural commodities pools that track those same four commodities, albeit in different proportions.
FUD and USAG include livestock in their portfolios and attempt to mitigate contango, but weight commodities differently. FUD's index is weighted by liquidity; USAG's index goes further, targeting the commodities with the greatest backwardation and/or price momentum and roll optimization.
UAG also uses a complex multifactor weighting scheme but excludes livestock. Its underlying index holds as many as three different contracts on each commodity it tracks, most of which are currently in sugar and corn.
Ultimately investors have a myriad of choices to play the segment, with a range of risks/returns, and many will simply choose DBA for its size and liquidity. That's not wrong—there's no absolute truth about weighting schemes in commodities after all—but those looking for more exposure to short-term price movements should focus on front-month products; those looking to make a longer-term play should consider the newer so-called contango killers. (Insight updated 10/20/17)