Will Teucrium’s New ETFs Fly?

September 20, 2011

Teucrium's three new single-commodity ETFs, targeting soybeans, sugar and wheat are first-to-market products. But will anybody care?

The answer might depend on the specific fund.

The three new ETFs join a pre-existing trio from the firm—the Teucrium Corn Fund (NYSEArca: CORN), the Teucrium Natural Gas Fund (NYSEArca: NAGS) and the Teucrium WTI Crude Oil Fund (NYSEArca: CRUD).

Each of them is designed to invest in futures contracts that are optimal, in that they limit contango—when futures contracts grow pricier with each succeeding month, a nagging aspect of many futures markets that can kill futures-based investments.

Despite these contango-killing aspects that each of Teucrium’s ETFs have, CORN is the only one among them that has attracted significant assets.

CORN NAGS CRUD
AUM $119,308,656 $1,896,544 $5,363,689

The reason NAGS and CRUD haven’t taken off has more to do with their competitors than the funds’ respective strategies. Both NAGS and CRUD have multiple funds to compete with. So, until Teucrium’s relative newcomers prove they can outperform competitors, it’s likely they’ll have difficulty attracting assets.

CORN, on the other hand, is the only fund that gives investors pure exposure to the corn market, so it’s no surprise its assets make up almost 95 percent of all the money Teucrium has attracted to its funds.

So, with that background in mind, what is the competitive landscape for the new group of Teucrium Funds?

Soybeans

The Teucrium Soybean Fund (NYSEArca: SOYB) is the only fund that gives pure exposure to soybean futures. Previously, the best way to access soybeans was by buying a fund that specializes in grains, a segment of the ETF market that currently makes up $328 million in assets under management.

Unfortunately, that might not have provided as much exposure to soybeans as some investors want and, moreover, it also mixes in corn and wheat.

SOYB invests 35 percent in second-to-expire contracts, 30 percent in third-to-expire, and the final 35 percent in the November following the expiration month of the third-to-expire contract.

I think it’s fair to assume that, as the only fund with full exposure to soybeans, SOYB will attract a reasonable amount of assets. Still, I think it’s unlikely that it will become as large as CORN. After all, global corn production, on a dollar basis, is almost twice as high as soybean output.

 

 

 

Sugar

The Teucrium Sugar Fund (NYSEArca: CANE), on the other hand, is joining a segment that already has competitors. The iPath Pure Beta Sugar ETN (NYSEArca: SGAR), and the iPath Dow Jones – UBS Sugar Subindex Total Return ETN (NYSEArca: SGG) together have $83.5 million in assets.

Whether CANE will cannibalize other funds in its segment or attract new assets remains to be seen. Still, CANE is the first fund invested solely in sugar that is not in an ETN structure. CANE avoids the credit risk attached with the iPath funds, and provides a lower tax rate for short-term investors.

CANE’s strategy is in part similar to SOYB, investing in second- and third-month contracts. But the remaining 35 percent of the fund’s assets are invested in March contracts instead of November—a difference that reflects an attempt to optimize returns in the respective markets.

One factor worth mentioning about CANE and its competitors in ETN wrappers is that the sugar market is in backwardation—the opposite of contango—when futures contracts are priciest in the here and now and ratchet downward each succeeding month on the futures curve.

A backwardated price structure allows the fund to buy new contracts that are cheaper than the ones being replaced, which is likely to help CANE’s returns, as well as those of its competitors.

Wheat

The Teucrium Wheat Fund (NYSEArca: WEAT) may be the fund poised to attract the most assets of the company’s three new ETFs.

To begin with, it’s the first fund to offer pure exposure to wheat futures. The United States is one of the largest wheat producers in the world, and it’s a commodity that’s closely followed as a gauge of food prices.

Unfortunately, the wheat market is currently suffering from rather steep contango. The current open-interest-weighted roll yield of wheat is a whopping 20.12 percent. Investors should be very wary of entering this market in its current form.

It therefore seems likely that roll costs may hurt returns for WEAT’s owners. We’ll just have to wait and see if WEAT’s strategy of owning second-to-expire, third-to-expire and December contracts can limit the amounts lost to contango.

Conclusion

All three new Teucrium funds provide something new. SOYB and WEAT are the first to provide pure exposure to their respective commodities, and CANE is the first non-ETN for sugar.

However these funds work out for Teucrium and for investors, at least one thing is already clear: They serve as examples of the ETF industry providing investors with exposure they can’t get elsewhere.

 

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