Ag ETFs Weathering Storm

September 08, 2011

The recent stock market plunge has once again reminded investors about the importance of being diversified across different asset classes to reduce their overall risk.

The uncertainty stemming from Europe’s sovereign debt crisis, S&P’s downgrade of U.S. debt and a slew of weak economic numbers have investors questioning whether we’re headed for another recession.

But predicting recessions is tough, and fully positioning your portfolio based on your convictions can be costly if you’re wrong.

A better approach may be to diversify into assets whose returns have low correlation with the daily movements of the broad market. To that point, two popular agricultural commodity funds have recently been flying under the radar and holding up extremely well.

Since Aug. 1, the SPDR S&P 500 Fund (NYSEArca: SPY) is down roughly 8.5 percent—but during this same period, the PowerShares DB Agriculture Fund (NYSEArca: DBA) and the Elements Rogers International Commodity - Agriculture Total Return ETN (NYSEArca: RJA) have done just fine, returning a stellar 4.2 percent and 4.7 percent, respectively.

1-Mo. Returns: SPY/DBA/RJA

Source: Bloomberg

DBA and RJA are both broad-based funds that provide investors with exposure to an array of agricultural commodities, including sugar, corn, wheat and soybeans.

DBA aims to track the DBIQ Diversified Agriculture Excess Return Index, and holds futures contracts from roughly 11 different commodities. DBA is the larger of the two funds, with over $2.8 billion in assets under management, compared with $619 million for RJA.

RJA is an exchange-traded note (ETN) that tracks the Rogers International Commodity - Agriculture Total Return Index. The benchmark, created by commodities guru and famed investor Jim Rogers is a bit more comprehensive than DBA’s index, and is composed of futures contracts from 22 different commodities.

With the world population projected to hit 9 billion by 2050, and with rising concerns about global warming and drought, the long-term growth prospects for agriculture seem exceedingly bullish. But agricultural commodities can also provide a hedge against inflation, which might be the big appeal here.


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