ETF.com: You mentioned CORN and WEAT. Do you use any other pure-play single-commodity ETFs, whether in the grain complex or in a different sector?
Engelbart: We also use the broad ag fund, DBA [the Invesco DB Agriculture Fund]. But it depends. We have a lot of different portfolios, so it depends on how specific we want to get with each client's account and how much risk they're willing to take.
ETF.com: Why DBA, versus other ETFs or ETNs that also give you diversified exposure?
Engelbart: We have a series of mutual funds that hold much of our commodity ETFs; the fund then is responsible for the K-1 tax form that comes with the three ETFs I mentioned. When we allocate for client portfolios outside those funds, we become much more cognizant of the K-1.
Nobody really likes them, because they come too late, and it's just a headache for clients. Many of our clients have said, "We don't want K-1s; I don't care what we need to do."
So in that case, we'll use something like RJA [the Elements Rogers International Commodity Index-Agriculture TR ETN]. It gets into some pretty esoteric commodities, but still gives us that exposure. We use ETNs, which have a little more favorable tax treatment.
You know about DBC and PDBC [the Invesco DB Commodity Index Tracking Fund and the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF, respectively. Author's note: PDBC offers effectively the same exposure as DBC, but structured such that it avoids issuing a K-1 form]. If Invesco would make a "PDBA," if you will—a K-1 free version of DBA—that would probably be our preferred vehicle inside of client accounts.
ETF.com: CORN and WEAT can be expensive funds to own and trade. Are you concerned about the cost of ownership? How do you factor it into your trading decisions?
Engelbart: Well, there are a couple things about the expense ratio. The sponsor fee—or how much Teucrium is actually getting—is actually 1%. What's listed gets into the 3’s. [Author's note: ETF.com lists CORN's expense ratio as 3.65%]. That makes us cringe. But it's not accounting for the futures collateral that's offsetting that expense ratio. When you offset that, you get a much more reasonable expense ratio.
From a trading perspective, we haven't had any issues getting in or out of the product, given the liquidity of the futures market underneath it. Teucrium did a good job structuring the product to hold liquid futures contracts.
It holds the second month, the third month and the next December, which generally has a pretty liquid contract. ETF.com even gives it a 5 out of 5 from a trading [block liquidity] perspective, last time I checked.
Like anything in the commodity space, obviously you've got to make sure you understand the product completely before you trade.
Contact Lara Crigger at [email protected]