As the economy has begun to improve heading into the second quarter of 2012, many commodity products have surged as well. Led by oil and industrial metals, many resources have jumped higher on a rosier outlook and the prospect for more demand as we move into the spring and summer.
Yet despite these solid performances in many key commodities, weakness has still been had in the agricultural market. Products in this space have struggled to match their more industrial brethren and many are posting a loss for the year despite the relatively positive economic outlook (see Hard Times In Soft Commodity ETFs).
Nevertheless, Teucrium, the Vermont-based issuer of commodity focused ETFs, looks to apply its novel approach to agricultural commodities in basket form, debuting the Teucrium Agricultural Fund (TAGS - ETF report) to investors. The brand new product looks to be structured as a fund-of-funds, utilizing an equal weight methodology to invest in the company’s four agricultural commodity ETFs including; Corn Fund (CORN - ETF report) , Soybean Fund (SOYB), Sugar Fund (CANE), Wheat Fund (WEAT).
“TAGS was designed as a fund of ETPs to allow investors to allocate investments in the four core agricultural commodities without having to rebalance their exposure themselves,” said Sal Gilbertie, President and Chief Investment Officer of Teucrium Trading, LLC. ”By using the fund of ETPs structure, we are not only providing investors with a greater degree of diversification, we are providing them with the same unique investment methodology used in each of the underlying Teucrium commodity funds. Investors now have a way to invest in a next-generation agricultural basket ETP that may be a better option than currently available alternatives.” (read USCF Launches Agricultural Commodity ETF)
The Teucrium strategy which Gilbertie is referring to is the company’s approach to commodity investing which seeks to limit contango issues. The four component funds each hold multiple futures contracts across the curve—unlike many commodity ETFs on the market today—which helps to smooth exposure and makes rolling into new contracts less of an issue. Additionally, all four hold at least three contracts in their respective funds including the second and third to expire contracts, as well as the contract in the most liquid or representative month.
This approach could be ideal for investors who have been hurt by contango in other funds which merely roll from one contract month, always staying in front-month contracts. This simple technique, while potentially more liquid, is relatively easy to front roll and can exhibit higher levels of contango than contracts that are further down the curve. As a result, TAGS could be thought of as a broad agriculture investment alternative for many investors (read Three Commodity ETFs That Have Not Surged).
Agricultural ETF Competitors
Despite the potentially superior strategy, the ETF could face some severe competition from several entrenched foes. By far the most popular is the PowerShares DB Agriculture Fund (DBA - ETF report) which has nearly $2 billion in AUM.
This product holds 10 commodities in total and has exposure that is tilted towards soybeans, cocoa, and coffee. So far in 2012, the product has lost about 4.5% while it is down double digits over the past half year period (read Should Investors Consider Commodity Country ETFs?).
Beyond this behemoth, there is also the RICI-Agriculture ETN (RJA - ETF report) which has a very respectable $400 million under management. This product has a tilt towards the grains sector—wheat and corn make up nearly one third of the total—although it holds 18 other commodities as well. Possibly thanks to this more spread out nature, the fund has lost just 0.9% so far in 2012 while it has lost 6.1% in the trailing six month period.
However, while both of these products may see impressive volumes and lower total costs than the new TAGS, investors could flow into the Teucrium fund if it manages to show a modest history of outperformance. Investors don’t really have a comparison for Teucrium’s corn or soybeans funds, but the company’s sugar and wheat products have underperformed their counterparts. Thanks to this, it remains unclear if the new fund will be able to attract a solid amount of assets from a variety of investors, although it does create an interesting opportunity for those seeking a new way to play the space in broad form.
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