Equity-Based Commodities: Better Than Futures?

October 29, 2009

Looking for spot commodity returns? Stock-based ETFs may actually be a better choice than commodity futures.


Equities-based commodities products are emerging from the dark corner of the commodities ETF space.

New offerings are flaring up with the promise of solving?or at least dodging?the issues that plague their derivatives-based cousins. Among them, growing concerns about a heavier CFTC hand on the futures markets have many investors looking for alternative ways to obtain commodities exposure.

Of course, equity-based products aren’t a one-for-one replacement for futures or spot price exposure. Equities are necessarily impacted by trends in the broader stock market. The long-term correlation between equities and futures is good, but not perfect.

Investing in commodities-linked equities can be more volatile than tracking spot prices of commodities, warns Ed Lopez, product manager for Van Eck’s family of commodity equity ETFs.

“Any small movement in spot prices can actually affect producers greatly,” Lopez said.

But then again, futures-based funds are not a panacea either. As Adam De Chiara, co-president of Jefferies Asset Management, explained, futures-based commodity index products may, over time, demonstrate significant tracking error against spot indexes due to the influence of contango.

The futures-based S&P GSCI Commodity Index, for instance, delivered a spot return through September of 33 percent. But once you account for contango, the spot return is just 4.7 percent.

By contrast, the Rogers-Van Eck Hard Assets Producers Index (RVEI), an index of commodity equities, has gained 35 percent in that period, actually coming closer to the spot commodity return.

Commodity Stocks Or Commodity Futures: Which Is Better?




“Equities are performing better than futures this year,” Lopez said. “And equities can give investors a pretty decent long-term growth potential” as opposed to futures, he added.

If investors want to tap into commodity-producing equities, they have a variety of choices. Let’s break them down a bit.


One of the newest offerings out is ALPS ETF Trust’s Jefferies TR/J CRB Global Agriculture Equity Index Fund (NYSEArca: CRBA). The fund invests in companies that are directly linked with seed production, seed traits, chemicals and fertilizers, farm machinery, equipment and irrigation, agricultural products, livestock and aquaculture.

CRBA enters a space well filled by the two-year-veteran Market Vectors - Agribusiness ETF (NYSEArca: MOO), a $1.6 billion ETF that also invests in agricultural names. MOO also happens to be marginally cheaper than CRBA: MOO’s expense ratio is 0.59 percent vs. CRBA’s 0.65 percent.

Perhaps the biggest difference between the two funds is at the broad sector level: MOO has 41 percent of its portfolio allocated to consumer staples, while CRBA has only 29 percent tied to that sector. By contrast, CRBA is 61 percent exposed to materials, while MOO is only 46 percent.

That means that while MOO emphasizes producers whose profits are determined primarily by distribution, marketing and packaging, CRBA focuses more heavily on manufacturers of seeds, chemicals and fertilizers, Richard Phillips, of S-Network?the company that created CRBA’s underlying index?said.

“This sector [materials] provides the broadest measure of agricultural productivity,” Phillips said.

But Lopez argued that MOO’s nearly 10 percent allocation to packaged foods and meats?namely companies like
Tyson, Del Monte and the like?gives the fund a more diversified exposure to commodities. CRBA has no exposure to stocks in that segment, Lopez said.

“Structurally, the funds are very similar. But MOO is more diversified,” said Lopez.

All in all, MOO holds 47 companies in its portfolio, compared with 29 in CRBA. And MOO provides exposure to 15 countries, more than CRBA’s 12.

Both have nearly a 50 percent allocation to
U.S. stocks, and 50 percent overseas.

Lopez said that while CRBA isn’t a dramatically different new product from MOO, its launch testifies to the growing demand for such equities-linked vehicles.


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