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Wednesday, February 28, 2024

The 8 Best Agricultural ETFs to Consider for Your Portfolio

Key points

  • Agriculture is a crucial sector, but it may not fit into your portfolio.
  • Agriculture ETFs track food and agriculture companies or baskets of commodities through futures contracts.
  • Agriculture ETFs often have high fees and many have limited liquidity.

ETFs allow investing in a wide range of assets through a single security. These effects can be massive and span the entire market, or narrow enough for just one sector or industry. Some sectors are more overlooked than others, and agriculture ETFs are among the more obscure securities on the market.

But are these ETFs worth a closer look? This article discusses how agricultural ETFs work and lists some options.

What are Agriculture ETFs?

Agriculture ETFs allow you to invest in underlying assets related to the agriculture sector, such as commodity futures, farm shares, or agricultural companies.

These ETFs are designed to give you a diversified portfolio of agricultural assets and a convenient way to gain exposure to the industry without purchasing each one individually. The ETFs typically track specific indices composed of different agricultural assets.

Is there an agricultural ETF?

Yes, there are plenty. Agriculture is one of the most important industries in the world because it is difficult to have a functioning society without a food supply. Agricultural companies are engaged in growing raw materials such as wheat and sugar (as well as various non-food products), raising livestock such as cows and pigs, running forestry and fishing businesses, and making products such as fertilizers, pesticides, and agricultural equipment.

The vast agricultural sector includes numerous ETFs that have emerged to provide exposure to the sector. These securities range from broad-based ETFs with different securities agricultural supplies to limit thematic funds based on a single commodity.

While there are fewer agriculture ETFs than bank or technology ETFs, investors looking for exposure will have plenty of options. But be prepared to pay: Agriculture ETFs are often small funds with limited liquidity and high fees.

Understanding Agriculture ETFs

One type of ETF farming focuses on commodity futures. These ETFs invest in contracts representing the future supply of agricultural commodities such as corn, soybeans or coffee. By investing in these futures, you can speculate on the price movements of these commodities without actually physically owning them.

Another kind Agriculture ETF focuses on shares of agricultural companies. These ETFs invest in companies involved in Agriculture, food processing, seed production and equipment manufacturing. By investing in these stocks, you can gain exposure to the overall performance of the agriculture sector.

How to Choose Agriculture ETFs

What are the best agriculture ETFs? When considering which agriculture ETF To buy, you first need to decide which assets you want exposure to. In your research, you will come across two different types of agriculture ETFs: ETFs that hold stocks related to the agriculture sector, such as the iShares MSCI Agriculture Producers ETF NYSE: VEGI and those who track commodity prices such as wheat or sugar, such as iPath Series B Bloomberg Agriculture Subindex Total Return ETN NYSE: JJA.

What is the difference? Agriculture stock ETFs will function like traditional ETFs, but commodity-based ETFs often have a different structure. As you will see in the list below, several funds are exchange traded notes (ETNs). An ETN is issued by an investment bank, not an asset manager like BlackRock or Vanguard. Unlike ETFs, which hold assets such as stocks, bonds or futures contracts, an ETN is an unsecured debt instrument that tracks a market index.

The price of the ETN rises and falls based on the performance of the underlying index. Established by Barclays Bank in 2006, ETNs are intended to provide retail investors with tax-efficient exposure to complex securities such as commodities or currencies. futures contracts. Think of them as the bond-like cousin of stock-based ETFs: the index tracked may be similar, but the risks and rewards differ. Credit risk is a concern with ETNs because no assets are held, but there is no tracking error and no dividends or distributions that confuse tax treatment.

8 Best Agriculture ETFs

What is the best agriculture ETF? The answer depends on your risk tolerance and the type of exposure you want. Here are eight different agriculture ETFs and ETNs that offer exposure to different parts of the sector.

Invesco DB Agriculture ETF

The first fund on our list, Invesco DB Agriculture ETF NYSE:DBA, is one of the oldest agricultural ETFs, but that doesn’t carry much weight in this sector. The Invesco DB Agriculture ETF was established in early 2007 and gives retail investors exposure to commodities through a balanced and highly liquid ETF.

DBA has just under $1 billion in assets under management and charges a net expense ratio of 0.91%. The fund holds a variety of futures contracts on commodities such as cattle, soybeans, corn, coffee and sugar, along with short-term U.S. Treasury bonds. DBA holdings are useful if you want exposure to commodities and want to avoid futures trading.

iShares MSCI Agriculture Producers ETF

If commodities aren’t your ideal asset class, the following two ETFs may be more right for you. The first is the MSCI Agriculture Producers ETF from BlackRock’s iShares. The iShares MSCI Agriculture Producers ETF NYSE: VEGI has many large agricultural stocks in its portfolio, such as Deere and company NYSE:DE, Archer Daniels Midland Co. NYSE:ADM And Corteva Inc. NYSE: CTVA. VEGI isn’t a large ETF with just over $260 million in assets, but its 0.39% expense ratio is cheap for an agricultural ETF and pays a small dividend. More than 56% of the fund’s investments are US-based companies.

VanEck Agribusiness ETF

The largest agriculture-related ETF is the VanEck Agribusiness ETF NYSE: MOO, with more than $1.25 billion in assets under management. Despite being the largest by assets, MOO is less liquid than the similarly sized DBA and only sees about a fifth of share volume daily. But MOO has a reasonable expense ratio of 0.55% and pays a dividend yield of more than 2%. The fund has more international holdings than VEGI (48% versus 44%), including some large European companies such as Bayer AG, Nutrien Ltd. and CNH Industrial NV. Some of the fund’s largest U.S. investments include Tyson Foods Inc. NYSE:TSN And The Toro Co. NYSE:TTC.

iPath Series B Bloomberg Agriculture Subindex Total Return ETN

The first ETN on our list comes from Barclays’ iPath and tracks the Bloomberg Agriculture Subindex. The iPath Series B Bloomberg Agriculture Subindex Total Return ETN NYSE: JJA The fund mimics the price of this commodity basket and currently weighs the heaviest on soybeans, wheat and corn. As an ETN, it pays no dividends, but the security does have an expense ratio of 0.45%, which is manageable for broad commodity exposure.

Teucrium Agricultural Fund

The Teucrium Agricultural Fund NYSE: TAGS is an investment firm focused on agriculture-related securities. It offers exposure to a basket of commodities through the firm’s four smaller funds. TAGS has only $33 million in assets, but it is a simple fund to invest in the price of wheat, corn, soybeans and sugar and has a minuscule expense ratio of 0.13%.

Global X AgTech and Food Innovation ETF

One of the newest ag ETFs is the Global X AgTech and Food Innovation ETF NYSE: CROPlaunched in 2021 by Global Oatly Group AB NASDAQ:OTLY And Tattooed Chef Inc. NASDAQ: TTCF. Liquidity is a concern as only 2,400 shares trade on average daily and the dividend yield is just 0.71%. The fund offers diverse international exposure: only 42% of its investments consist of US companies.

iPath Series B Bloomberg Coffee Subindex Total Return ETN

One of the offshoots of Barclays’ JJA fund, the iPath Series B Bloomberg Coffee Subindex Total Return ETN NYSE: JO fund limits exposure to coffee futures only. Tracking just the Bloomberg Coffee Subindex creates more volatility, as coffee prices tend to fluctuate wildly, especially during periods of economic uncertainty. JO uses the same expense ratio of 0.45% as its cousins. It is also an ETN, so make sure you understand the risks and benefits of these products before investing.

Cambria Cannabis ETF

Now a piece of alternative agriculture ETF: Cambria Cannabis ETF BATS: TOKE. One of the fastest growing sectors is the cannabis industry, as more and more US states take steps to relax marijuana laws. The cannabis sector has been volatile in recent years. The Cambria Cannabis ETF owns a variety of cannabis, tobacco, and agriculture stocks, such as Scotts Miracle-Gro Company NYSE:SMG, Altria Group Inc. NYSE:MO And Jazz Pharmaceuticals PLC NASDAQ: JAZZ. The fund has just over $11 million in assets under management and an expense ratio of 0.42%.

Pros and cons of investing in agriculture ETFs

Investing in agricultural ETFs has pros and cons. Before putting capital to work in this sector, consider these points and how they could impact your investment objectives.

Positives

The benefits of investing in agriculture ETFs include:

  • Investing in commodities: Traders can invest in commodities through agricultural ETFs and ETNs. Commodity trading traditionally involves complex futures contracts and requires a specific type of trading account. ETFs and ETNs are sold on major exchanges and you don’t need margin to buy them.
  • Undercovered sector: You won’t see Jim Cramer answering many questions about agricultural ETFs and stocks during his nightly Mad Money rounds. Some agricultural stocks like it Deere and company NYSE:DE are market cap giants valued at $100 billion. Yet there are many more small companies that remain under the radar Arcadia Biosciences Inc. NASDAQ:RKDA or Intrepid Potash Inc. NYSE: IPI. Although risky, small agriculture stocks often slip through the cracks when it comes to analyst coverage and ratings.

Cons

The disadvantages of investing in agriculture ETFs include:

  • Expensive funds: One of the benefits of ETF investing is the ability to buy entire market sectors (or the market as a whole) through one low-cost fund. Unfortunately, many agricultural ETFs hold stocks and commodity contracts, which can lead to high fees.
  • No dividends: If you’re looking High Dividend ETFs, you probably won’t find the agricultural sector attractive. Many funds are ETNs, debt securities that do not pay dividends or distribute capital gains.

Factors Affecting Agriculture ETFs

Between geopolitical events, climate change and technological advancement, Macroeconomic factors play a major role in shaping investment decisions within the agricultural sector. They can impact the performance of agricultural ETFs.

Geopolitical events can cause volatility and uncertainty in the market. This could include political tensions, trade disputes or changes in government policy. These conflicts can disrupt supply chains, affect export/import dynamics and affect commodity prices. For example, if a country imposes tariffs on wheat, its trading partners can sometimes retaliate, resulting in price fluctuations and market instability.

Climate change, especially if it causes extreme weather events such as droughts, floods or hurricanes, can also lead to crop failures, lower yields and overall market instability. As climate change increases, consider the potential risks and opportunities it presents when considering the sector.

Finally, there are technological innovations such as precision farming techniques, genetic engineering and automation have the potential to revolutionize the agricultural sector. These improvements can improve crop yields, reduce costs, increase efficiency and ultimately impact the performance of agricultural ETFs.

Strategies for Investing in Agriculture ETFs

Timing is the most important consideration when investing in agriculture ETFs. Here are some strategies you can consider to maximize your investment potential:

  • Research market cycles: Like any sector, agriculture experiences cycles of growth and decline. Understanding these cycles can help you time your investments better. For example, agricultural stocks and commodities often perform well during high demand for crops, such as the planting and harvesting seasons.
  • Diversify your portfolio: Agriculture ETFs provide exposure to a variety of assets, including crop producers, seed and fertilizer producers, farm equipment companies, and even cannabis producers. By diversifying your portfolio across different subsectors within agriculture, you can tap into different sources of potential growth and limit risk.
  • Keep an eye on geopolitical events: Stay informed about political developments, trade agreements and policies that could impact the agricultural sector. These can create opportunities or pose risks for agricultural ETFs. For example, a trade deal that opens new export markets for corn could benefit companies that grow or process corn.
  • Consider the risks of climate change: In the face of increasingly severe climate-related events, assess the resilience of the farms in your portfolio. Look for companies that use sustainable agricultural practices, invest in climate adaptation technologies or develop drought-resistant crops. Stay informed about weather patterns and climate change forecasts to see how they could affect crop yields and commodity prices.
  • Consider long-term trends: Look for long-term trends that could drive growth in the sector, such as an exploding global population, changing dietary preferences and increasing demand for organic and sustainable food. You might see an increase in companies practicing organic farming, plant-based alternatives, and eco-friendly practices.
  • Stay informed of technological developments: Keep a close eye on the development of technology. As precision farming techniques, genetic engineering and automation develop, they can significantly impact the performance of agricultural ETFs.
  • Evaluate commodity prices: Keep an eye on prices of key crops such as corn and soybeans as they drive the sector. Understanding the dynamics of supply and demand can help you make informed decisions. Weather conditions, global demand and government policies can all influence commodity prices.
  • Analyze financial performance: Take the time to assess the financial health of the companies included in the agriculture ETFs. Look at their revenue growth, profit margins, debt levels and overall stability. Strong financial companies are more resilient to market fluctuations and provide consistent returns.
  • Use technical analysis: Technical analysis means studying price patterns and market trends to predict future price movements. This can be useful for timing entry and exit points in agriculture ETFs. You can identify potential buying or selling opportunities by analyzing charts, indicators and patterns.
  • Seek professional advice: If you’re unsure how to navigate the complexities of a farmland ETF, consider consulting a financial advisor who specializes in the sector. They can provide you with expert insight and help you develop a customized investment strategy based on your objectives and risk tolerance.

As the agriculture industry evolves, a handful of emerging trends will likely shape the future of agricultural ETFs. They involve innovations, sustainable practices and technological advancements that can revolutionize the industry.

A striking trend is the increasing attention to sustainable agricultural practices. With environmental conservation and climate change at the forefront of the global discussion, investors are looking for agricultural ETFs that use sustainable and environmentally friendly growing methods. This includes precision agriculture techniques, which use data and technology to optimize crop production while minimizing resources. Companies that develop drought-resistant crops or invest in climate adaptation technologies are also gaining ground. Agriculture ETFs can attract socially conscious investors and potentially outperform their peers in the long term.

Consumers are looking for more organic and sustainable food options as they become more health and environmentally conscious. This shift offers agricultural ETFs the opportunity to invest in companies that specialize in organic farming methods and plant-based alternatives.

Technological advancements also play a crucial role in shaping the future of agricultural ETFs. In addition to precision agriculture, genetic engineering and automation have already revolutionized the agricultural sector. These improvements can further improve crop yields, reduce costs and increase efficiency in the sector.

Crucial sector, but not a slam dunk

Agriculture is one of the most necessary industries on earth. But markets don’t always make sense, and just because an industry is essential to the survival of the species doesn’t make it an excellent investment.

Agriculture ETFs are often a mix of stocks and commodities, meaning investors need to understand two asset classes to successfully navigate this sector. Not only are these funds different from most other sector ETFs, but they also need to be expensive and illiquid, especially as the funds’ themes narrow.

Always perform due diligence on these securities and understand how futures contracts work before investing in ag ETFs.

Frequently Asked Questions

Still wondering what the best agricultural ETFs are? Here are some frequently asked questions about agriculture stocks and how they fit into the broader market:

What is the largest agricultural ETF?

The largest agriculture ETF is the Invesco DB Agriculture ETF, with more than $900 million in assets under management.

What are the best ETFs for investing in farmland?

While there is no specific farmland ETF per se, several ETFs invest in farmland stocks, such as the DB Agriculture ETF and the VanEck Agribusiness ETF.

Which agricultural shares are best to invest in?

When it comes to agricultural supplies, “best” is a very subjective term. Some investors will favor food producers and farms, others may prefer companies that make farm equipment and pesticides. Or you can avoid stocks altogether and focus on agricultural commodities like wheat, soybeans, livestock or grains.

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