Grow Your Portfolio With Agriculture Funds

Investors love to invest in the energy sector because of the enormous growing demands for energy worldwide and its use as a natural hedge to inflation. However, another sector that is technically an energy sector, but is not considered part of it, is the agriculture industry. Whereas the oil and gas industry provides energy for your car and home, the agriculture industry provides the energy for your body. Which do you think is more important?


Solid Long-term Fundamentals and Increasing Demand
If you want exposure to agriculture commodities as a hedge to inflation or to diversify your portfolio, a pure-play agriculture commodity ETF would probably be your best bet. In general, agriculture commodities have historically had a low correlation to stocks and bonds, so their addition can help reduce the overall risk in your portfolio. In addition, the long-term underlying fundamentals for agriculture commodities are considered very solid, and the demand is expected to steadily increase in the future. With that said, below are some of the best ways for investors to gain exposure to an under-appreciated sector.

PowerShares DB Agriculture Fund (DBA)
One of the most popular ways to play this sector is through the PowerShares Agriculture ETF. The DBA tracks the DBIQ Diversified Agriculture Excess Return Index, and it holds futures contracts on commodities like feeder cattle, cocoa, coffee, corn, cotton, lean hogs, live cattle, soybeans, sugar and wheat. The fund’s expense ratio is a little bit higher than average at 1.01%, but it offers good liquidity and diversity in return.

iPath Down Jones-UBS Grains Subindex Total Return ETN (JJG)
If you just want exposure to grains, the iPath Grains ETN is likely one of your best options to consider. This ETN uses futures contracts to invest into only three types of grains - soybeans (40%), wheat (19%) and corn (41%). The fund’s high concentration in grain commodities could be very lucrative if the grains’ hot streak in recent years continues. The yearly fee runs at 0.75%, which is around average. However, the daily volume on this ETN is significantly lower than the DBA fund, which could pose a liquidity issue for larger positions.

ELEMENTS ROGERS – Agriculture Total Return ETN (RJA)
Another good way to gain exposure to agriculture is through the ELEMENTS RICI Agriculture ETN. This fund is the most diverse agriculture fund among the group listed here with 22 different commodities. The top holdings are corn (13.6%), wheat (13.6%), cotton (12%) and soybeans (9.6%). Also, this fund tends to be less volatile than other less-diversified funds and could be a good addition to an already well-diversified portfolio that is lacking agriculture exposure. The yearly fee for RJA is 0.75%.

These three agriculture funds are not the only way to invest in agriculture. Numerous funds are also worth looking into, including the iPath DJ-AIG Agriculture ETN (JJA), the ELEMENTS MLCX Grains ETN (GRU) and many others. This article should be thought of more as an introduction that can be used as a good starting point for further research.

Bottom Line
Agriculture commodities can play a complementary role for an investor’s portfolio. With only so much land available for farming, and a growing population and fast-growing middle class in developing countries, the supply-and-demand fundamental supports looking more into investing in agriculture. (If you aren’t familiar with the ETN structure, see Exchange Traded Notes – An Alternative To ETFs.)

Thursday, August 4th, 2011 Uncategorized

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