A Farmville Opportunity With A Commodities ETF

Broadly speaking, commodities are a disappointing asset class this year, particularly when considering the U.S. dollar is one of the worst-performing developed market currencies. Commodities are denominated in U.S. dollars, meaning that when the dollar slides, commodities should do the opposite.

Year-to-date, the U.S. Dollar Index, which tracks the greenback against a basket of major developed market currencies, is off nearly 5 percent. The PowerShares DB Agriculture Fund DBA is lower by less than 1 percent.

Agriculture Vs. The Greenback

DBA, which turned 10 years old earlier this year, tracks the DBIQ Diversified Agriculture Index Excess Return. That benchmark “is a rules-based index composed of futures contracts on some of the most liquid and widely traded agricultural commodities,” according to PowerShares, the fourth-largest U.S. ETF issuer.

“Presently, DBA has its highest weighting to Live Cattle (17.21 percent), followed by a 12.58 percent allocation to Corn, 12.11 percent to Soybeans, 11.99 percent to Wheat, 10.33 percent to Lean Hogs, 10.23 percent to Sugar, 8.61 percent to Cocoa, 8.33 percent to Coffee, 5.50 percent to Feeder Cattle and 3.06 percent to Cotton,” Street One Financial Vice President Paul Weisbruch said in a note.

Digging Into DBA

Home to $706 million in assets under management, DBA is one of the largest agricultural exchange-traded products on the market. Since the ETF tracks an index and not commodities futures, investors are less exposed to dangers of contango that arise with some futures-based commodities ETFs. Contango is the scenario where traders are paying more than a futures contract today than the commodity's spot price is expected to be several months out.

Several well-known agricultural commodities exchange traded products “are ETFs and not ETNs, which may be useful for those investors or portfolio managers whom are prohibited from investing in ETNs — or simply favor the ETF product structure for various reasons,” said Weisbruch.

DBA also makes sense for investors looking for exposure to less liquid, more volatile commodities rather than opting for an ETF exclusively dedicated to the likes of coffee, cotton or cocoa. Those are among the most volatile commodities, agricultural or otherwise.

Investors have pulled $8 million from DBA over the past month, according to PowerShares data.

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