Trading Grain ETFs

June 19, 2019

Grant Engelbart

All eyes are on grains—especially corn—as extreme weather and ongoing trade tensions have caused plantings in the Midwest to greatly lag historical records. Prices of agricultural commodities have risen, offering opportunities in single-commodity ETFs, like the Teucrium Corn Fund (CORN), which allow traders to play the space with ease. recently chatted with Grant Engelbart, senior portfolio manager and director of research for CLS Investments. He follows the grains complex closely, and explained how he uses CORN and other commodity ETFs inside CLS' client portfolios, worth $9.2 billion. We've been covering the grain space quite a bit on lately. (Read: "Floods & Tariffs Lift Grain ETFs"; listen: "ETF Prime Podcast: Grain Funds Pop.") You’ve also increased your allocation to corn ETFs recently. Why do you find CORN [the Teucrium Corn ETF] to be a compelling trade at the moment?

Grant Engelbart, CLS Investments: Generally, we're asset allocators. We're not all that tactical; we take a consistent amount of risk and make sure it's balanced in our portfolios.

That leads us to use many different asset classes, particularly those with strong diversification properties. As of late, that's been hard to find, but agricultural commodities tend to be driven by [fundamentals] completely diversified from the stock market, like weather conditions.

We're value investors as well, so we're constantly scouring the world for attractive value. When we look at an asset class like agriculture, one that’s been beaten down for years, we see compelling prices relative to their inflation-adjusted average prices.

Here in the Midwest—we're located in Omaha, Nebraska—we've started to see changes in the supply/demand characteristics of the market that have led us to say this is attractive from a long-term perspective.

So we've invested in broad agriculture in general. We also use WEAT [the Teucrium Wheat Fund]. Generally, you maintain a consistent commodity allocation, then.

Engelbart: Yes, internally we use an asset allocation benchmark that includes a 5% commodity allocation. Within that, we could own broad commodities or get more nuanced. ETFs allow us to do that easily. Have you shifted your positions within that allocation from other single-commodity ETFs or from other diversified commodity exposure to CORN and WEAT?

Engelbart: It's kind of a combination of both. We've taken exposure from our existing commodity allocations and shifted it into corn, but we're also adding a little bit more to the asset class in general. We've taken a little bit from equity and fixed income, but we keep our risk consistent as we reallocate. For you, this is a short-term call. But how short term is that? Is this something you'll reevaluate by the end of the summer? By the end of the year? By the end of next Tuesday?

Engelbart: Generally, we maintain three- to five-year allocations, so this would be shorter than that. It's more tactical, from our standpoint. But I'd say [we'd hold] through the end of the harvest season. There's speculation, but not a ton of hard facts, about these commodities until specific agricultural reports come out, so we'd want to see those first.

Realistically, though, it's about a year’s play through the harvest and until the supply/demand dynamics fully shape out.

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