Investing in companies involved in food and its production appears to be a winning strategy, on the surface. And exchange-traded funds may seem like a low-cost, diversified way to benefit from a growing population on a planet with finite resources.
Yet the notion that rising demand and limited supply will lead to higher prices for funds that invest in agri-businesses and soft commodities such as corn and wheat hasn’t borne fruit.
In fact, ETF investing in this sector has been a losing or, at best, a lacklustre proposition. The world’s largest soft commodity ETF, for example, Invesco’s DB Agriculture Fund (DBA-A) has seen an annualized loss of 6 per cent over the past decade.
Agri-business ETFs have fared better. The most widely traded, the VanEck Vectors Agribusiness ETF (MOO-A), has seen an annualized return of about 5 per cent over the past decade. However, that’s still less than the S&P 500′s average annualized return of about 13 per cent over the same period.
“The one positive the sector has is that it’s been beaten up so long … it may have room to run,” says Eric Balchunas, senior ETF analyst at Bloomberg Intelligence in New York and author of The Institutional ETF Toolbox.
Still, investors seeking a contrarian bet on agriculture don’t have many ETF options, Mr. Balchunas adds.
Below are the only four ETFs offering exposure to agriculture companies and one with direct exposure to the commodities many of these firms produce.
Management expense ratio (MER): 0.56 per cent
Assets under management (AUM): US$623-million
Year-to-date (YTD) return: 0.73 per cent (all data from Morningstar as of Oct. 26 market close)
The largest ETF in the sector, MOO offers exposure to “a fairly wide array” of farm-equipment manufacturers, chemical makers (i.e. fertilizers and pesticides), seed producers and even pharmaceutical firms producing medicine for livestock, says David Kletz, vice-president and portfolio manager at Forstrong Global Asset Management in Toronto.
The problem with MOO is “it can be more challenging to get a firm grasp on the varying economic drivers that influence returns” because the holdings are involved in other sectors such as health care and industrials, he adds.
More than half of MOO’s geographical exposure is to the United States, with Canada, Germany and Japan accounting for about another 25 per cent.
Todd Rosenbluth, head of ETF research with CFRA Research in New York, points out the ETF’s top holdings, including Deere & Co. and Tyson Foods Inc., make MOO attractive in the year ahead as food demand should rebound as economies recover from COVID-19.
“The fund is likely to outperform the global equity category without taking on much risk,” he says.
Still, Mr. Rosenbluth says MOO is “narrowly focused” and could underperform diversified indices, such as the S&P 500, as it has for the last decade.
MER: 0.39 per cent
YTD return: 3.3 per cent
An alternative to MOO, VEGI is the second-largest equity-focused ETF in the sector. It has higher weightings to consumer staples, industrials and materials companies than MOO, without the health care exposure, Mr. Rosenbluth says.
That’s translated into a five-year annualized performance of about 7 per cent (it launched in 2012), compared with MOO at about 9 per cent.
Its international exposure may explain some of the difference, with slightly larger allocations to Norway and China and little German exposure, he adds.
VEGI also holds 136 companies versus MOO’s 52. Like MOO, Mr. Rosenbluth says he believes “the fund is positioned to outperform.”
However, he says VEGI is more concentrated by sector than MOO, potentially making it a bit riskier.
Yet both have similar U.S. exposure of about 55 per cent, so even if its international stocks go “on a fabulous run versus the U.S, it probably would be a moot point,” Mr. Balchunas of Bloomberg says.
MER: 0.7 per cent
YTD loss: 5 per cent
FTAG is the smallest of the agriculture equity ETFs. Unlike its peers, it doesn’t use capitalization weighting to select holdings.
“It uses fundamentals [screen] to pick the stocks, sort of like an active manager would,” Mr. Balchunas says.
Unfortunately, the strategy hasn’t been profitable. FTAG has seen a 5-year annualized loss of 5 per cent and an annualized 10-year loss of about 16 per cent.
One reason for its underperformance compared with MOO and VEGI is that it only has about 25 per cent of assets invested in U.S. companies, Mr. Balchunas says.
Another concern for investors is FTAG’s low AUM, leading to wider bid/ask spreads, he adds.
FTAG’s small size also puts it at risk of closing, joining other ETFs that recently ceased trading, including the Global X Fertilizers/Potash ETF (SOIL-A), which closed in August, and the Defiance Next Gen Food & Agriculture ETF (DIET-A), which launched last November and closed in May.
MER: 0.71 per cent
YTD loss: 3.7 per cent
COW is the only Canadian-listed agriculture ETF. It seeks to replicate the performance of the Manulife Global Asset Agriculture Index, net of expenses, according to provider BlackRock.
It offers similar exposure to the VEGI and MOO, only with fewer holdings: 35 stocks.
Canadian exposure in the ETF is similar to its U.S.-listed counterpart MOO, but COW’s U.S. exposure is far higher at more than 80 per cent.
Forstrong’s Mr. Kletz says COW may appeal to Canadian investors seeking to “avoid foreign-exchange conversion costs.”
And while more expensive than VEGI and MOO, its 10-year annualized performance of about 8 per cent makes it the sector’s top long-term performer.
MER: 0.85 per cent
YTD loss: 10 per cent
Several ETFs track soft-commodities futures, including many following single commodities such as wheat. DBA, however, tracks the collective performance of several widely traded commodities such as corn, cotton, sugar and soybeans.
“The upside is you are holding a basket of these … so at least you’re diversifying your risk,” Mr. Balchunas of Bloomberg says.
The challenge, like all ETFs tracking futures, is DBA often suffers from selling expiring contracts at a low price and buying new contracts at a higher price. This often results in “a slow corrosion of returns” over long periods, he says.
That said, DBA may be useful for short-term trades. “If you have an opinion that something will happen in the agriculture space in the next couple of weeks, by all means, DBA may be a good way to play it,” Mr. Balchunas adds.