Though global economic growth is still hinged on the crisis in
Europe and the sluggish U.S. job markets, rising food prices have
become a major concern in the economies the world over.
The world food prices including cereals, oilseeds, dairy, meat
and sugar are surging to new highs due to the scorching heat and
the worst U.S. drought in nearly a half-century (read: Bet on
Higher Food Prices with These Three ETFs).
The bad weather has also resulted in the worst wheat harvest
since the late 1980s. In fact, harvest levels of this key crop
dropped 14% on average this year further underscoring the issues
that this corner of the market is seeing.
The cost of dairy costs jumped the most in more than two years.
Livestock breeders and dairy farmers are now continuously passing
on the increased cost of feed to consumers, suggesting there is
still more hikes to come.
If that wasn’t enough, in June and July, a heatwave in Russia
and a major drought in that key grain growing nature led to higher
prices as well, as 45% of the corn and 35% of the soybean crop were
destroyed (read: How Do You Invest for the Coming Crop
Crisis?).
The hike in food prices forebodes gnawing hunger for a slice of
the American population. Americans on lower incomes are consuming
less food due to 30% appreciation in the prices of fruit, milk,
cheese and egg.
Unfortunately, relief doesn’t appear to be coming anytime soon
either, as according to a recent data from the U.S. Department of
Agriculture, Americans expect to pay 3-5% more on groceries next
year too.
In other words, there seems to be little relief in sight for
high food prices. This is especially true with another round of
monetary stimulus from central banks in many countries flowing into
the markets, thus weakening the dollar and giving even more
strength to commodity prices in the near term.
Investors concerned about the uptick in food prices,
particularly if the drought continues and crop yields continue to
plummet, might want to watch these four ETFs outlined below (see
more ETFs in the Zacks ETF Center). These funds could be especially
impacted by any continued trends in food prices, and particularly
if prices continue to ascend in the near future.
E-TRACS UBS Bloomberg CMCI Food ETN
(FUD)
Investors seeking a broad play on the food segment of the
commodity market should find FUD an intriguing choice. Launched in
April 2008, the product provides wide exposure to a portfolio of
agricultural and livestock commodity futures through a single
investment. The commodity futures contracts are diversified across
three constant maturities from three months up to one year.
The note tracks the performance of the UBS Bloomberg CMCI Food
Index Total Return index, net of fees and expenses. The fund holds
10 commodities in the basket, all of which can be classified as
‘softs’. Top holdings include sugar (24%), soybeans (19%) and corn
(16%) while other in-focus commodities also make an appearance in
the product as well (read: What Happened to the Sugar ETF?).
The product charges 65 bps in fees per year from investors.
Despite the lower fees, volume is unfortunately quite bad in the
note, coming in at about 7,700 shares a day.
This means that investors have to pay extra cost in the form of
wide bid/ask spread. The ETN has posted remarkable performance so
far this year, yielding over 9% returns (as of October 12) and
attracted $27.9 million worth of assets.
iPath Dow Jones-UBS Livestock ETN
(COW)
For investors seeking exposure to livestock, COW could a good
choice. The product seeks to replicate the price and yield of the
Dow Jones-UBS Livestock Subindex Total Return index, a sub-index of
the Dow Jones-UBS Commodity Index Total Return index. The returns
of the product are available through an unleveraged investment in
the futures contract on livestock commodities.
The product puts roughly 70% of its exposure in live cattle
contracts while lean hogs account for the rest of the portfolio.
The note is quite expensive, charging 75 bps in annual fees from
investors.
It is relatively liquid as it trades in volumes of 36,000 shares
per day on average. The product was launched in October 2007 and
has managed assets worth $54.6 million so far this year.
The product has had a lackluster performance, losing about 6% in
the year (as of October 12). This suggests that investors still
have time to get in on the note, especially if herd sizes continue
to shrink and feed costs rise heading into the fall. The ETN
retains a Zacks Rank # 1 or ‘Strong Buy’ rating, suggesting that
the fund has more upside potential ahead this year.
PowerShares Dynamic Food & Beverage ETF
(PBJ)
For investors believing that costs can easily be passed on to
end users, and are seeking a concentrated play on the food and
beverage segment from a stock perspective, PBJ could be an
interesting pick (read: Time to Buy the Food and Beverage
ETF?).
The fund tracks the Dynamic Food & Beverage Intellidex
Index, which uses various investment criteria like price momentum,
earnings momentum, quality, management action and value to include
stocks in the list.
Launched in June 2005, the product holds 30 securities with AUM
of $106.5 million. The fund puts nearly 46% in the top ten firms.
Archer Daniels Midland (ADM), Coca Cola (KO) and Mondelez
International (MDLZ) enjoy the top three positions in the basket.
Large cap accounts for a substantial 46% share while mid and small
cap account for the remaining portion of the basket.
About 91% of the portfolio goes to consumer staples companies
while the rest goes towards consumer discretionary (read: The
Comprehensive Guide to Consumer Staples ETFs). The ETF is
relatively cheap when compared to its counterparts, charging 63 bps
in fees per year.
Trading in good volume of about 48,000 shares per day, the
product has tight bid/ask spread. The fund delivered impressive
returns of over 4% year-to-date (as of October 12) and yields a
decent dividend of 1.21% annually.
PBJ currently has a Zacks Rank # 3 or ‘Hold’ rating.
PowerShares DB Agriculture ETF
(DBA)
Investors targeting agricultural commodities could choose DBA.
Launched in January 2007, the fund seeks to replicate the price and
performance of the DBIQ Diversified Agriculture Index Excess Return
index plus interest income from treasuries, before fees and
expenses.
It is one of the most popular and the largest fund in the
commodity space. The fund is composed of futures contracts on some
of the most liquid and widely traded agricultural commodities that
trade on American markets.
The fund has a wide variety of 10 commodities in its basket. Top
holdings include soybean (14%) and cocoa (13%) while the another
three commodities - coffee, wheat and live cattle - make up 12%
each as well (read: Cocoa ETFs: The Safe Haven in Agricultural
Commodities?). The fund has amassed close to $1.9 billion in AUM
and sees volume of over one million shares a day.
While the fund is expensive in the space charging 1.01% in
annual fees, there is no extra cost involved in trading this
popular product given its solid volume. The fund has gained only
0.10% so far this year (as of October 12).
DBA currently has a Zacks Rank # 2 or ‘Buy’ rating. This
suggests that the ETF would outperform its peers over the upcoming
one-year period.
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ARCHER DANIELS (ADM): Free Stock Analysis Report
IPATH-DJ-A LVST (COW): ETF Research Reports
PWRSH-DB AGRIC (DBA): ETF Research Reports
E-TRC UBC FOOD (FUD): ETF Research Reports
COCA COLA CO (KO): Free Stock Analysis Report
PWRSH-DYN FD&BV (PBJ): ETF Research Reports
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