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Commodity ETFs


Since 1999 one of the best performing investments has been agriculture. Lean Hogs for example is up more than 300% since 1999, compared to a negative return for stocks. Moreover Sugar #11 is up almost 500% since 1999 more than 5 times what stocks have returned in the same time period.

Yet the agricultural investment boom still has major legs, compared to gold and oil ,agriculture has barely increased in on a relative to Oil and Gold on an inflation adjusted basis. Why is this because there has been very little retail involvement in the agricultural sector, due to lack of funds or ETFsthat trade in sugar, lean hogs corn etc.

Moreover according to Jeremy Grantham of GMO, one of the most famous predictors of asset allocatio, he states in his most recent letter  that he predicts in the next decade the world will face a shortage of food, including grains meats and sugar, and that prices will be driven up to "bubble type valuations" that have never been seen before.

His thesis is predicated upon the combination of explosive growth in world population (the rising demand factor) as well as a decrease in supply through global warming and soil erosion. These factors combined according to him will create a huge bull market for all agricultural based ETFs.

If the upward trend in agricultural prices continue the best and most efficient way to invest in agriculture is through the Deutsche Bank Agricultural ETF (DBA - ETF report). This is really the only ETF that offers a "pure play" on agricultural commodity futures.

DBA is the only ETF that holds the real futures contracts for Sugar, Lean Hogs, Corn, Cotton Wheat etc. Also as of the most recent quarter DBA is heavily concentrated in Sugar futures, almost 13% of the porfolio as well as Coffee, Cocoa, Corn and Lean Hogs. This is a good thing since my two favorite commodities for the future are Sugar and Lean Hogs because of the potential upside return they both offer.

Sugar, even after an almost 500% increase in price since 1999, is still more than 50% below the all time high of 64 cents an ounce which occrurred in 1974. That would mean well over 100% gains from todays price, and that isnt even on an inflation adjusted basis.

Lean Hogs also has great upside potential, even though it is up more than 300% in price since 1999. Hogs has been in a consoldiation pattern bouncing back and forth betwwen $.90 cents a pound and $.30 to $.40 cents a pound over the last 12 years. It just broke this massive consolidation pattern on August 4th and closed at over $.94 cents a pound an all time high for this commodity. Thus if you use the commonly applied technical analysis measuring formula for consolidation patterns, it projects Lean Hogs to reach a price of $1.50 a pound a more than 60% return from todays prices.

The huge potential return that agricultural commodities offer combined with its little or no correlation to the stock market makes it one of the best investment vehicles for the future. This is why DBA is a great addition to any portfolio.

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