Floods & Tariffs Lift Grain ETFs

June 07, 2019

Pros & Cons Of Commodity Pool ETPs

WEAT and CORN both track an index of wheat and corn futures, respectively, that includes the second and third contracts from expiry, as well as the next December contract following the third contract. These three batches of futures are weighted at 35%, 30% and 35%, respectively.

Spreading out exposure along the futures curve has the potential to boost returns during times of steep contango (a condition in which futures contracts that are further away from expiry have higher prices than those nearer to expiration). But diversified futures exposure can also nudge a fund's returns away from those of spot and front-month futures.

WEAT and CORN—the only ETFs to offer pure-play exposure to the futures contracts of their respective grains—are also notable for their sky-high expense ratios: WEAT has an annual cost of 3.63%, while CORN has an annual cost of 3.65%. That, combined with not-insignificant spreads, can make the cost of trading and holding these ETFs substantial.

ETNs Also An Alternative

Another downside of commodity pools is that they issue a K-1 form at tax time, which can add to filing delays and headaches for investors unfamiliar with the form (read: "K-1 Taxes Hurdle For Commodity ETFs").

This is something that GRU, JO and JJG avoid, as they are all exchange-traded notes (ETNs).

ETNs are debt notes issued by a bank that promise to deliver the returns of a given index, less fees. Because ETNs don't have to buy or sell futures contracts, their tracking error to their benchmarks is often much lower than funds that must trade actual portfolios.

They also tend to have lower management fees.

Yet ETNs carry with them the risk of issuer default: Should the bank that issues them go belly up, the ETN shareholders presumably would be out of luck. It's unlikely, but it has happened in the past, such as when Lehman Brothers went bust (read: "The Lehman Bros. ETN Fallout").

Series B Adds Improvements

GRU tracks an index of front-month futures contracts for the three major grains—soybeans, corn and wheat—as well as for soybean oil. JJG, meanwhile, tracks a production- and liquidity-weighted index of grains futures contracts, each ranging from one to five months from expiration.

JO, which tracks coffee futures, tracks a single futures contract either two or three months out and holds until maturity.

Notably, JO and JJG are part of Barclays' "Series B" line of ETNs, a suite of notes mostly identical to older products, but updated with several investor-friendly attributes, including a call feature and lower expense ratios (read: "iPath Commodity ETNs Return To Old Tickers").

Agriculture ETPs Lag In Assets

Neither the commodity pool funds nor the ETNs have gained much in the way of investor assets. Year to date, the largest agricultural commodity ETF is the Invesco DB Agriculture Fund (DBA), which has $432 million in assets under management. All other agriculture ETPs have less than $100 million invested.

 

Top 5 Largest Agricultural Commodity ETPs
Ticker Fund AUM ($M) Expense Ratio
DBA Invesco DB Agriculture Fund 432.18 0.89%
JO iPath Series B Bloomberg Coffee Subindex Total Return ETN 94.51 0.45%
CORN Teucrium Corn Fund 82.30 3.65%
WEAT Teucrium Wheat Fund 58.17 3.63%
SOYB Teucrium Soybean Fund 30.88 3.63%

Source: ETF.com; data as of June 5, 2019

 

Contact Lara Crigger at [email protected]

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