The first time I met Sal Gilbertie, at the Morningstar ETF Conference in Chicago in September, he shared everything he wanted me to know about his company on a flash drive shaped like an ear of corn. And the interesting thing is that it didn't seem the least bit odd.
Gilbertie is president and chief investment officer of Teucrium Trading, a firm that prides itself on pioneering single-commodity agricultural exchange-traded products (ETPs) in the US. One of its six futures-based commodity ETPs invests in -- you guessed it -- corn. The others invest in sugar, wheat, soybeans, crude oil, and natural gas.
Last week, Teucrium, which has offices in Sante Fe, N.M., and Brattleboro, Vt., launched a multicommodity exchange-traded fund that will invest equally in the company's four single-commodity agricultural ETPs. Gilbertie said during a meeting in Manhattan that the Teucrium Agricultural Fund (NYSE Arca: TAGS) is the first ETP to offer exposure to agricultural commodities in a single fund of ETPs.
There are other agricultural ETPs, including the popular PowerShares DB Agriculture Fund (NYSE Arca: DBA), but they cast wider nets. DBA, which has about $2 billion in assets, has holdings in cattle (16.7%), cocoa (11.1%), coffee (11.1%), cotton (2.8%), and lean hogs (8.3%), in addition to sugar, corn, wheat, and soybeans, which make up about 50% of the portfolio.
The new Teucrium fund will hold an equal weighting of the Teucrium Corn Fund (NYSE Arca: CORN), which is down 5.17% so far this year; the Teucrium Soybean Fund (NYSE Arca: SOYB), which is up 11.51%; the Teucrium Sugar Fund (NYSE Arca: CANE), which is up 2.66%; and the Teucrium Wheat Fund (NYSE Arca: WEAT), which is down 5.49%.
CORN, which launched in June 2010, is the largest of the Teucrium funds, with more than $66.7 million in assets. The other three, which all debuted in September, have struggled so far to gain traction with investors, according to Morningstar (Nasdaq: MORN). SOYB has $6.2 million. WEAT has $5.8 million, and CANE has $4.7 million.
Gilbertie said all the funds are structured to reduce the effects of contango and backwardation on returns. Contango occurs when the price of a futures contract is higher than the spot price. Backwardation is the inverse situation -- the spot price of an asset is higher than the futures price. Rather than focusing on next-to-expire futures contracts, for example, the Teucrium Corn Fund spreads exposure across multiple maturities. It allocates 35% to the second-to-expire CBOT contract, 30% to the third-to-expire CBOT contract, and 35% to the CBOT contract expiring in the December following the expiration month of the third-to-expire contract.
But this structure comes at a price. Morningstar reports that the expenses for CORN are 1.42%, and those for WEAT, CANE, and SOYB are all 1.53%. The new fund, TAGS, charges about 1.65%. That gives all the funds the dubious distinction of having some of the highest expense ratios among ETFs, according to ETFdb.
Obviously, the funds aren't for everyone. They're expensive, and commodities by their very nature are volatile. However, Gilbertie said that they have a place in select portfolios, and that the new fund of funds is a good way for investors to allocate a portion of their portfolio to four core agricultural commodities without having to rebalance their exposure themselves. "What we're doing is providing investors with a greater degree of diversification, as well as opportunities to invest in a next-generation agricultural basket ETP that may be a better option than currently available alternatives."
Many analysts say agricultural commodity investment can help diversify a portfolio due to the lower correlation to equities. The simplest reason to make such an investment is because you believe the prices of agricultural commodities will rise.
Still, it's important to remember that, even if the prices do climb, you do not necessarily have direct exposure when you buy an agricultural ETP, because futures-based funds do not hold the physical commodities. And even Gilbertie said that, even though the price performance of agricultural commodity futures is tied to movements in the spot markets, they are derivatives and thus only track imperfectly in the short term.
The bottom line: Investors should be aware of the risks when they dabble in commodities -- and ETPs, for that matter -- and take appropriate precautions. To get you started, Investor Uprising asked Gilbertie what he considers the most important things investors should know about exchange-traded products in general. We'll share his response with you tomorrow.