What are Agricultural ETFs? Agricultural exchange-traded funds (ETFs) provide a convenient means to access the agricultural sector. These funds monitor the performance of agricultural commodities, companies, and indexes. Unlike purchasing individual commodities or stocks, investing in an agricultural ETF offers a diversified portfolio in this area, with shares that trade like stocks. These ETFs can supply a basket of various agricultural assets, ranging from corn and wheat to companies specializing in farm equipment.
Key Takeaways: Agricultural exchange-traded funds (ETFs) expose investors to the agricultural sector and its potential for long-term growth. There are two types of agricultural ETFs: those for agribusiness stocks and those for sector-specific commodities. When investing in agricultural ETFs, you need to review their expense ratios, liquidity, underlying assets, and performance history. Top agricultural ETFs include the Invesco DB Agriculture Fund (DBA), VanEck Vectors Agribusiness ETF (MOO), and iShares MSCI Global Agriculture Producers ETF (VEGI). Understanding Agricultural ETFs: Agricultural ETFs operate by pooling investor capital to purchase a range of assets related to farming and agriculture. These ETFs then track the price movements of those assets. When you invest in an agricultural ETF, you are essentially buying shares in this portfolio. The value of your shares rises or falls with the fund’s performance. The fund is managed by authorized participants who ensure the ETF’s price reflects the value of its underlying assets. There are two main types of agricultural ETFs: Those that invest in the stocks of agribusiness companies listed on stock exchanges, known as agribusiness ETFs. Those that invest in one or more agricultural commodities (either directly or indirectly using derivatives contracts). Agribusiness ETFs: The first type of agricultural ETF focuses on investing in the stocks of agribusiness companies. These companies are involved in all or part of the agriculture supply chain, including production, processing, distribution, and retail. Investing in these ETFs exposes investors to seed and fertilizer manufacturers, farm machinery producers, food-processing companies, and large-scale farming operations. Agribusiness ETFs offer a way to invest in the business side of agriculture, leveraging the potential growth of these companies. These ETFs typically track an index comprising agribusiness stocks. Investors benefit from the diversification that these ETFs offer since they are not tied to the performance of a single company but the collective performance of several. However, it’s important to note that investing in agribusiness stock ETFs also means exposure to risks typical in the stock market, including market volatility and company-specific risks. These ETFs generally suit investors who are interested in the agricultural sector’s growth potential but prefer publicly traded companies’ stability and established nature. Agribusiness ETFs Compared: Symbol ETF Name Mandate Expense Ratio Total Assets ($Million) Average Volume (30 days) Dividend Yield MOO VanEck Agribusiness ETF Selects pure-play agribusiness stocks whose revenues are more than 50% derived from agri-chemicals, animal health and fertilizers, seeds and traits, farm/irrigation equipment and machinery, aquaculture and fishing, livestock, cultivation, plantations, and trading of agricultural products 0.Investing in Agricultural ETFs: A Comprehensive Overview
Agricultural ETFs are gaining popularity due to their potential to tap into the growth of agribusiness companies fueled by global food demand and technological advancements. The iShares MSCI Agriculture Producers ETF (VEGI) includes stocks of companies involved in the production of fertilizers, agricultural chemicals, farm machinery, and packaged food, among others. This ETF has a net expense ratio of 0.39%, with assets under management (AUM) of $82.481 million as of February 1, 2024.
Another option is the First Trust Indxx Global Agriculture ETF (FTAG), which consists of sub-industries like chemicals and fertilizers, seed manufacturers, irrigation equipment providers, and farm machinery companies, including farmland companies. This ETF has a net expense ratio of 0.70% and AUM of $9.43 million.
For investors looking into emerging technologies and food products, the iShares Emergent Food and AgTech Multisector ETF (IVEG) tracks an index of companies expected to benefit from these advancements. It has a net expense ratio of 0.47% and AUM of $4.71 million.
The Global X AgTech & Food Innovation ETF (KROP) passively invests in global companies working on advancing technologies in agriculture and food industry spaces, with a net expense ratio of 0.50% and AUM of $4.44 million.
Risks and Benefits of Agribusiness ETFs
The primary advantage of these ETFs is their diversification within the stock market, offering more stability than direct commodity investments. They are best suited for investors seeking exposure to the agricultural sector through a traditional stock market approach. However, they carry risks, including market volatility and sector- and company-specific issues.
Agricultural Commodity ETFs
These ETFs invest in agricultural commodities like corn, soybeans, wheat, and cattle. Some invest directly, while most use derivatives contracts such as futures and options. This approach allows investors to invest in commodity price moves without holding physical goods. They are useful for hedging against inflation and diversifying beyond traditional stocks and bonds. However, they come with risks such as commodity price volatility and complexities of derivatives trading.
Source: TradingView (figures as of Feb. 1, 2024)
Agricultural Commodity ETFs offer direct exposure to the commodities markets, targeting agricultural products like grains and livestock. ETFs such as DBA (Invesco DB Agriculture Fund) tracks an index of 10 agricultural commodity futures including corn, soybeans, wheat, and more. Other funds like WEAT (Teucrium Wheat Fund), CORN (Teucrium Corn Fund), SOYB (Teucrium Soybean Fund), CANE (Teucrium Sugar Fund), TAGS (Teucrium Agricultural Fund), OAIAA (Teucrium AiLA Long-Short Agriculture Strategy ETF), and TILL (Teucrium Agricultural Strategy No K-1 ETF) also have specific mandates. Source: TradingView (figures as of Feb. 1, 2024).
Risks and Benefits of Agricultural Commodity ETFs: The main benefit is providing a hedge against inflation and diversification not correlated with the stock market. They can be attractive for potential high returns, especially during commodity scarcity or increased demand. However, they come with risks like high volatility due to weather and geopolitical events. The use of derivatives adds complexity and risk. Agricultural commodity ETFs are suitable for investors seeking direct exposure to the commodities market and willing to handle higher volatility. Agricultural Commodity ETFs Pros & Cons: Pros include more direct tracking of specific commodity prices and being easier than trading directly in commodities or derivatives markets. It could be a more effective inflation hedge. Cons are using derivatives which can be complex and carry risks like contango and backwardation. They also face direct risks from bad weather, natural disasters, and supply and demand shifts. Things to Consider When Investing in Agriculture ETFs: Key factors when evaluating agricultural ETFs include commodity exposure. Some focus on farming equipment, fertilizer producers, distributors, etc.Agricultural ETFs offer various investment opportunities. Some directly or indirectly hold agricultural commodities, with the latter being more volatile. Look for global diversification across geographies, including emerging markets with strong population growth to mitigate weather effects and natural disasters on production and distribution.
Supply chain positioning matters. ETFs focused on upstream producers face more weather risks compared to downstream processors and distributors with diversified input sources. Some agribusiness companies offer attractive dividends contributing to total returns. Commodities-based ETFs don’t pay dividends. ESG criteria like sustainable farming practices are important to many investors. Compare expense ratios. Higher expense ratios eat into net returns. Check liquidity with sufficient assets under management, reasonable bid-ask spreads, and daily trading volumes for easy purchases and sales. Evaluate index methods on weighting among subsectors, market caps, and geographies. Tax considerations are crucial. Some commodity exchange-traded products are structured as limited partnerships, leading to Schedule K-1 for tax purposes and complicating filings. Certain commodity ETFs can generate unrelated business taxable income for tax-exempt investors. Commodity ETFs holding futures may have income subject to blended 60/40 tax rates. When comparing individual agricultural stocks, agribusiness ETFs, and agricultural commodity ETFs, consider factors like investment focus, diversification, market exposure, volatility, potential for growth, complexity, suitability, risk management, and income potential. There’s currently no specific ETF for investing exclusively in farmland. However, the First Trust Indxx Global Agriculture ETF (FTAG) includes farmland companies and those involved in chemicals and fertilizers, seeds, irrigation equipment, and farm machinery.Agricultural ETFs can give indirect exposure to farmland through crops and equipment. This is because ETFs hold securities like stocks and bonds rather than direct land holdings. At least two real estate investment trusts (REITs), Gladstone Land Corp. (LAND) and Farmland Partners Inc. (FPI), hold primarily farmland and trade like shares on stock exchanges but own and manage real property on behalf of shareholders. Gladstone Land Corp. has farmland and farm facilities across the United States, primarily targeting fruit and vegetable cropland. Farmland Partners Inc. purchases, leases, and manages farmland throughout North America, comprising more than 178,000 acres.
Are Agriculture ETFs a good long-term investment? Past performance depends on the specific time frame and type of ETF. Agriculture as a sector has shown mixed results historically. Performance is closely tied to the agricultural commodities market, which is highly volatile. Weather patterns, geopolitical events, global supply-demand dynamics, and economic trends influence this sector. Periods of commodity scarcity or booming global demand can lead to impressive returns, while oversupply or reduced demand can lead to underperformance. As the world population increases, demand for food and related businesses grows, potentially driving long-term growth in the agriculture sector. Innovation and sustainability measures can boost productivity and efficiency, benefiting agribusiness companies’ profitability. Is Agriculture a good inflation hedge? It is often considered so because it involves tangible assets whose value can rise with increasing prices. The essential nature of agricultural products ensures steady demand, which can grow during inflationary periods, potentially leading to higher commodity prices. Supply constraints, such as limited land and water resources, can further elevate prices when demand outstrips supply. Research shows that agricultural products historically had the highest correlation with inflation compared with energy and industrial commodities, but since the second half of the 20th century, the correlation has fallen and energy commodities have become a more effective hedge.Investing in agricultural ETFs presents a balanced approach to risk and potential reward. It enables investors to participate in the growth of the essential agricultural sector while diversifying their portfolio for stability.
There are two main types of agricultural ETFs: Agribusiness ETFs and commodities ETFs. Agribusiness ETFs invest in a broad range of stocks related to agriculture and farming, providing exposure to the industry’s performance. Commodities ETFs, on the other hand, focus on investing in agricultural products such as corn or wheat through derivatives contracts. Understanding the intricacies of agricultural ETFs is crucial for making informed investment decisions. Factors such as expense ratios and global market influences play a significant role in the performance of these ETFs. It’s important to consider these nuances before investing. The comments, opinions, and analyses provided here are for informational purposes only and should not be taken as individual investment advice or recommendations. The information is believed to be reliable, but its accuracy and completeness are not guaranteed. The views and strategies described may not be suitable for all investors. Market and economic conditions are subject to rapid change, and all comments, opinions, and analyses are provided as of the date of posting and may change without notice. This material does not constitute a complete analysis of every material fact regarding any country, region, market, industry, investment, or strategy.