McCall’s Call: Food ETFs For Thought

August 11, 2010

Food costs are on the rise, but a growing array of exchange-traded products focused on agriculture can help investors cope.

If you feel your weekly grocery bill is increasing this year, you’re spot on. Prices are heading higher for a lot of reasons, including growing demand from the developing world. The good news is that there are a number of exchange-traded products that can help investors offset those rising costs, and even profit from them.

Matthew D. McCallEarlier this year, the U.S. Department of Agriculture predicted that food prices would rise by 2.5 to 3.5 percent after an increase of 1.8 percent in 2009. That number may end up being even higher after a recent surge in the price of agricultural commodities.

Weather is always a factor behind food-price spikes, but a more long-term factor is growing middle classes across the emerging markets. Russia may be holding onto grain harvests to deal with drought, but in places like China and India, demand for rice, soybeans and other staples will keep rising, even as seasonal supplies vary.

There are a few options for investors that range from an ETF called—you’ve got to love this—“MOO” that invests in agribusiness companies to a fund that owns the agricultural commodities to funds that track single commodities.

Agribusiness Companies

Indeed, one of the most popular ETFs in the sector is MOO, also known as the Market Vectors Agribusiness ETF (NYSEArca: MOO). It owns 46 stocks from around the globe. The ETF is most heavily invested in agricultural chemicals (39 percent), agri-product operations (32 percent) and agricultural equipment (15 percent).

Rising commodity prices will help many of these companies because they will give farmers the financial resources to spend more on equipment, fertilizer and seeds.

MOO has underperformed the S&P 500 Index so far this year, but a recent surge has helped it regain some of the losses and it appears the sector is beginning to turn around.

Still, investing in MOO also means you’re taking on risk that the management at one of the companies held by the fund underperforms and doesn’t take advantage of rising commodity prices.

Commodity ETPs

You can address that risk by investing in a handful of agricultural commodity ETPs that are currently on the market.

The PowerShares DB Agriculture ETF (NYSEArca: DBA) invests in futures contracts that track 11 commodities. The largest holdings in the ETF are cattle, soybeans, sugar, corn, cocoa and coffee. With the largest position accounting for 12.5 percent of the total allocation, the ETF offers true diversification in the sector.

The iPath Dow Jones-UBS Agriculture ETN (NYSEArca: JJA) has a similar name, but a much different makeup than DBA. For starters, JJA is an ETN, whereas DBA is an ETF and it has direct ownership of the commodity futures. ETNs are debt obligations backed by the issuer, and are designed to track the underlying index, minus expenses.

The allocation is also very different from DBA’s, with only seven commodities represented. Soybeans make up 26 percent, corn 22 percent and wheat at 18 percent. The expense ratios are similar: 0.85 percent for DBA and 0.75 percent for JJA. Performance is not far apart, with JJA falling 20 percent since the start of 2008 and DBA losing 22 percent. Both ETFs slightly beat the S&P 500.

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