Agriculture ETF and ETNs

- Dugald Malcolm, Montreal, Canada

For most investors looking to take advantage of the recent bull market in the agricultural sector, playing with individual agricultural futures is a rather daunting task and quite time consuming. Instead, investor usually turn to exchange traded securities which tend to be a lot simpler to incorporate into one’s portfolio.

The three most popular options are PowerShares DB Multi-Sector Commodity Trust Agriculture Fund (NYSE Arca: DBA), Elements Rogers International Commodity – Agriculture Index ETN (NYSE Arca: RJA) and iPath Dow Jones AIG – Agriculture ETN (NYSE Arca: JJA). So what are the differences behind these rather long-winded named products?

First, it is important to point out that while DBA is an ETF, the other two products, RJA and JJA, are ETNs. An ETF, or exchange traded fund, usually consists of a basket of underlying securities, currencies, options or, as in this case, underlying commodities futures. Unlike a mutual fund, ETFs trade like a stock on an exchange on an intraday basis.

An ETN, or exchange traded note, also trades like a stock, however, is structured very differently from an ETF. While an ETN does track the return of its underlying indices, it is actually a debt product like a debenture or bond, however there is no protection of principal nor any associated coupon. Caveat emptor: exchange traded notes carry with them and added layer of risk above their underlying constituents. As debt products they carry with them credit risk.

Now let’s look under the hood of these three products:

PowerShares DB Multi-Sector Commodity Trust Agriculture Fund is the most liquid of the three. It trades at an average volume of 3.3 million shares per day. With an expense ratio of 0.85%, DBA has the highest fees of the bunch. DBA has the following compositional weightings (taken from their website):

DBA has a year-to-date return of 8.10%.

Elements Rogers International Commodity – Agriculture Index ETN trades at an average volume of 1.1 million shares per day. It has an expense ratio of 0.75%.

RJA has a year-to-date return of 7.65%.

iPath Dow Jones AIG – Agriculture ETN is the least liquid of the three products, with a daily average of just 119 thousand shares. Like RJA, JJA has an expense ratio of 0.75%.

JJA has a year-to-date return of 5.44%.

So while PowerShares DB Multi-Sector Commodity Trust Agriculture Fund might have a higher expense ratio, it more than makes up for it by outperforming the other two products. It also provides investors with the most liquid product. Elements Rogers International Commodity – Agriculture Index ETN, while still liquid, provides the most diversification for potential investors, with 22 underlying commodities. Finally, iPath Dow Jones AIG – Agriculture ETN provides investors with the most concentrated portfolio of agriculture, with just 7 underlying commodities. The lion’s share of the weightings, 64%, are the big three grains: corn, soybeans and wheat.

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