Commodities: Agriculture Livestock
All three ETNs in the livestock segment offer highly concentrated exposure to live cattle and lean hogs, while completely omitting feeder cattle.
COW dominates the livestock ETP space
“All three ETNs offer highly concentrated exposure, while omitting feeder cattle” as far as AUM. It was the first livestock-focused ETP to launch, in late 2007. While $25M may seem small in any other segment, it constitutes over ¾ of total assets in the livestock space. In fact, COW is the only product without a "high" closure risk. For active traders, COW is really the only viable option. While its $250K in onscreen liquidity is not robust by any means, it constitutes over 90% of the segment's total volume. Not surprisingly, COW, which follows the same front-month futures strategy as our benchmark, gets the highest Fit score. In short, investors looking for the most stable, easiest-to-access product with basic coverage of the livestock space should look no further than COW.
The other two ETNs have some serious shortcomings in assets and liquidity that need to be considered. Both UBC and LSTK have under $5M in assets and currently rate as high risks for closure. UBC trades less than $30K most days at wide average spreads of 50+ bps. Spreads for LSTK are also high and volume is low, making the ETN largely untradeable. On the bright side, despite having the highest expense ratio in the segment (0.85%), LSTK tracks its index well. LSTK also scores highly in our block liquidity score, so those looking to trade in size should get a better deal using a liquidity provider. Both UBC and LSTK follow strategies that attempt to mitigate the effects of contango: LSTK selects certain contracts on the futures curve, while UBC holds 3- and 6-month contracts in a laddered fashion. (Insight updated 11/22/17)
ETF.com Efficiency Insight
COW is clearly the established player here and leads the pack in Efficiency. Its $25M in AUM makes up 3/4 of the segment's total assets, though that's still not enough to dispel
“All 3 products are structured as ETNs, meaning they all come with credit risk ” closure risk concerns (COW gets a "medium" closure risk score, while LSTK and UBC are both at "high" risk).
Still, despite COW's dominance in assets, it loses points for loose tracking. COW has, at time, beaten its index by over 0.50% or lagged it by more than 1%. UBC, which has the lowest expense ratio (65 bps) in the segment, hasn't fared much better. Meanwhile, LSTK, which charges a segment-high 85 bps, has consistently trailed its index by even more than its fee, sometimes by more than twice as much.
All three products are structured as ETNs, meaning they all come with credit risk of their issuer. COW's and LSTK's notes are issued by Barclays, while UBC's notes are issued by UBS. Their ETN structure also means long-term investors get a tax advantage since gains from the sale of shares get taxed as long-term capital gains if shares are held for more than a year, similar to the way equities get taxed. (Insight updated 11/22/17)
ETF.com Tradability Insight
COW is a no-brainer for anyone trading actively, as its liquidity dwarfs its competitors in an illiquid segment. While COW's $250K in median volume might be considered weak in other
“COW is a no-brainer for anyone trading actively” segments, it covers 90% of all trading volume within the livestock segment. Despite this lofty liquidity advantage, COW's average spread still warrants the use of limit orders, which goes to show just how illiquid the segment is.
LSTK is virtually untradable, with not a single share changing hands most days and a wide average spread to boot. While UBC sees more activity—roughly $25K changes hands daily—its 50+ bp spreads make it difficult to get in and out of a position without incurring unwanted costs.
All three ETNs have perfect block liquidity scores, suggesting those looking to trade 25K shares or more may get a better deal through a liquidity provider. (Insight updated 11/22/17)
ETF.com Fit Insight
Aside from their rolling strategies, the three ETNs encompassing the livestock segment offer little in the way exposure differences. All three split their weightings similarly, with roughly
“Aside from their rolling strategies, the three ETNs offer little in the way exposure differences” 60% in live cattle and 40% in lean hogs. That's distinct from our benchmark, which weights live cattle at roughly 2/3 with the remaining 1/3 in lean hogs.
The contract selection differences are wider in range. COW, like our benchmark, follows a front-month strategy, and as expected, has the highest Fit. LSTK differentiates itself from the pack by dynamically choosing specific futures contracts to try to mitigate the effects of any contango. Meanwhile, UBC follows a laddered approach, holding contracts with maturities of 3 and 6 months out, also in an attempt to mitigate the effects of contango.
Both LSTK and UBC have beaten our benchmark over the past few years, suggesting that their contango-fighting strategies are working. Unfortunately, the difficulty and expense of trading both notes could negate their higher performance for all but the longest-term investors. (Insight updated 11/22/17)