Agricultural exchange-traded funds (ETFs) offer a practical investment vehicle for those seeking exposure to the agriculture sector without having to buy individual commodities or stocks. These funds are designed to track agricultural commodities, related companies, and sector indexes, allowing for a diversified investment that can hedge against inflation, enhance portfolio diversification, and tap into the global demand for food production.
Key Highlights of Agricultural ETFs
- Diversified Exposure: Agricultural ETFs allow investors to hold a diverse portfolio related to the agricultural industry, from raw commodities to agribusiness firms.
- Types of Agricultural ETFs: These funds generally fall into two categories:
- Agribusiness ETFs: Focus on companies in agriculture, such as equipment manufacturers and food processors.
- Commodity ETFs: Track agricultural commodities directly or through derivatives, such as corn, wheat, and soybeans.
- Top Agricultural ETFs: Popular options include Invesco DB Agriculture Fund (DBA), VanEck Agribusiness ETF (MOO), and iShares MSCI Global Agriculture Producers ETF (VEGI).
Understanding Agricultural ETFs: How They Work
Agricultural ETFs pool investor capital to create a portfolio that mimics the performance of the agriculture sector. Managed by financial firms and market makers, they allow investors to buy shares of a fund that reflects the underlying value of its assets. Prices generally track an index or market benchmark, with authorized participants working to ensure ETF prices align with their net asset values (NAVs).
Types of Agricultural ETFs
- Agribusiness ETFs
- Focus: Agribusiness ETFs invest in stocks of companies involved in agriculture, such as farm machinery, fertilizers, seed production, and food processing.
- Advantages: These ETFs offer a way to benefit from the stability and growth of established businesses while diversifying across the agriculture sector.
- Risks: Exposure to typical stock market risks, such as volatility, inflation, and company-specific risks.
- Agricultural Commodity ETFs
- Focus: These ETFs invest in commodities like corn, soybeans, wheat, and livestock. Most use futures contracts to gain exposure, as storing physical commodities is costly and impractical.
- Advantages: Commodity ETFs can serve as an effective hedge against inflation and provide diversification as their performance does not closely correlate with stock markets.
- Risks: Highly volatile due to supply-demand dynamics and influenced by weather conditions, global trade policies, and political instability. Additionally, derivatives trading adds complexity with potential challenges like contango and backwardation.
Top Agribusiness ETFs
| Symbol | ETF Name | Mandate | Expense Ratio | Total Assets ($M) | Average Volume (30 days) | Dividend Yield |
|---|---|---|---|---|---|---|
| MOO | VanEck Agribusiness ETF | Invests in companies with significant agricultural revenue sources, such as chemicals and livestock | 0.53% | $824 | 81.4k | 3.15% |
| VEGI | iShares MSCI Agriculture Producers | Companies in fertilizer, machinery, and food production | 0.39% | $149 | 40.4k | 2.70% |
| FTAG | First Trust Indxx Global Agriculture | Includes chemicals, fertilizers, and farmland companies | 0.70% | $9.4 | 3.0k | 3.95% |
Top Agricultural Commodity ETFs
| Symbol | ETF Name | Mandate | Expense Ratio | Total Assets ($M) | Average Volume (30 days) |
|---|---|---|---|---|---|
| DBA | Invesco DB Agriculture Fund | Tracks index of 10 agricultural commodity futures, including corn, wheat, and sugar | 0.93% | $698 | 535k |
| WEAT | Teucrium Wheat Fund | Wheat futures contracts (excludes front-month contracts) | 2.80% | $175 | 553k |
| CORN | Teucrium Corn Fund | Corn futures contracts (excludes front-month contracts) | 2.71% | $72 | 52k |
| SOYB | Teucrium Soybean Fund | Soybean futures contracts (excludes front-month contracts) | 2.73% | $28 | 19k |
| CANE | Teucrium Sugar Fund | Sugarcane futures contracts (excludes front-month contracts) | 2.80% | $18 | 45k |
| TAGS | Teucrium Agricultural Fund | Balanced exposure to corn, wheat, sugar, and soybeans | 0.13% | $17.6 | 2.6k |
Pros and Cons of Agricultural ETFs
Agribusiness ETFs
Pros:
- Exposure to the entire production and processing supply chain
- Diversification within the sector
- Managed portfolios that reduce individual stock selection efforts
Cons:
- Limited exposure to the actual commodities
- Sensitive to input cost inflation and shifting consumer trends
Agricultural Commodity ETFs
Pros:
- Direct exposure to commodity price movements
- Convenient means of accessing commodities markets without physical handling
- Effective hedge against inflation
Cons:
- Higher volatility due to unpredictable supply and demand
- Complexities from derivatives trading, including contango and backwardation
Investment Considerations
When evaluating agricultural ETFs, here are some factors to consider:
- Commodity Exposure: Some ETFs focus on agribusiness stocks, while others target commodities directly. Each has unique risk and return profiles.
- Geographical Diversification: Some ETFs include emerging markets, providing more balanced exposure to global agriculture.
- Dividend Yield: Agribusiness ETFs may offer dividends, but commodity ETFs typically do not.
- Environmental, Social, and Governance (ESG) Factors: Sustainable and ethical practices are increasingly popular considerations for investors.
- Expense Ratios: Higher ratios reduce net returns, so comparing similar ETFs on this factor is important.
- Liquidity: Funds with high daily trading volumes tend to have lower bid-ask spreads, making it easier to enter and exit positions.
Tax Considerations
Commodity-based ETFs, structured as limited partnerships (LPs), may pass income, gains, losses, and deductions to investors, leading to complex tax filing requirements. Additionally, commodity-based ETFs with futures contracts may incur unique tax treatments under the U.S. tax code. Consult a tax professional when dealing with commodity ETFs to understand your obligations fully.
Alternative Investment Options
- Farmland Investment: While agricultural ETFs do not directly hold farmland, First Trust Indxx Global Agriculture ETF (FTAG) has exposure to farmland companies, and REITs such as Gladstone Land Corp. (LAND) and Farmland Partners Inc. (FPI) provide direct farmland investment.
- Inflation Hedge: Agricultural commodities may serve as inflation hedges. Although historically effective, research suggests that energy commodities now provide a more reliable inflation hedge than agriculture.
Are Agricultural ETFs a Good Long-Term Investment?
Agricultural ETFs can be a strategic addition to a portfolio, particularly for those looking to hedge against inflation or capitalize on increasing global food demand. Agribusiness ETFs are generally less volatile and offer dividend income, while commodity ETFs offer direct exposure to the ups and downs of commodities prices.
The world’s growing population and increasing demand for food products contribute to the long-term appeal of agricultural ETFs. Innovation in farming technology and sustainable practices also support agribusiness growth, while climate and weather events often impact commodity prices, sometimes generating significant returns during scarcity.
Agricultural ETFs offer diverse options, from agribusiness stocks to direct commodity exposure. Whether through agribusiness companies or physical commodities, investors can use these ETFs to hedge against inflation, add diversification, and gain exposure to the agriculture industry’s essential goods and services.
Agribusiness ETFs are suitable for those seeking stability and growth in the agriculture sector, while agricultural commodity ETFs provide more direct exposure to commodity prices but come with higher volatility. By understanding each fund’s structure, risks, and tax implications, investors can make informed choices that align with their investment goals.
As with any investment, conducting thorough due diligence and consulting financial and tax professionals can help you determine the best agricultural ETF strategies for your portfolio.
