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Agriculture ETFs: What Would Jim Rogers Do?

October 25th, 2012

Jared Cummans: As Bernanke and the Fed continue to print more money and debase the dollar, investors are becoming increasingly concerned with the potential impact this will have on inflation. This has led to many turning to commodity investments to help protect their portfolios. Among the most popular inflation hedge investments are agricultural commodities, as food prices are among the first to feel the effects of inflation. As such, a number of big name investors have been recommending ag as the place to be for the coming years [for more agricultural news and analysis subscribe to our free newsletter].

Among those famous investors stands Jim Rogers, arguably one of the biggest ag bulls in the market. Rogers has had an extremely successful investing history and holds a big influence on the allocations of investors around the world. For quite some time now, Rogers has been telling investors to invest in hard assets, like ag, to protect themselves from what he feels will be a coming recession for the US.

Two of the most popular ways for investors to gain exposure to this segment come from the DB Agriculture Fund (NYSEARCA:DBA) and the Rogers Intl Commodity Agric ETN (NYSEARCA:RJA). While we are quite certain that Rogers would choose the fund named after him, the choice for investors may not be as clear-cut [see also Jim Rogers: This Sector Will Boom in the Coming Years].


DBA Wins the Popularity Contest

DBA is by far a more popular fund than its competitor, with over $1.8 billion in assets; that’s more than 35 times the size of RJA ($50 million). Also, DBA trades more than 3 times as many shares on an average day, keeping it in the limelight. But the drawbacks for this product are twofold. For starters, DBA utilizes the ETF structure, meaning that it is subject to tracking error that can throw off underlying returns. This also means that the fund will issue a pesky K-1 come tax season, a form that many wish to avoid.

The second drawback that investors should be aware of is the exposure; DBA lacks a strong diversity, as its top 6 holdings account for 72% of the fund. Though it does invest in 11 different contracts, it cannot match the widespread allocations made by its smaller counterpart [see also 5 Best-Performing Commodities Of 2012].

RJA Takes the Diversity Cake

It may be a smaller and less popular fund, but RJA has a better allocation spread for investors. The fund invests in 22 different contracts including some lesser-known crops like azuki beans and oats. This diverse spread makes RJA an attractive buy for the long-term, as the fund is less dependent on the performance of just a few contracts which makes it a less risky hold.

Investors should also note that the product is structured as an ETN, meaning that it will never incur tracking error. ETNs are instead subject to credit risk of the issuer as they are debt instruments. RJA is issued by Merrill Lynch, Pierce, Fenner & Smith, a subsidiary of Bank of America.

Performance and Expenses

Returns
Ticker YTD 3 Year 5 Year
DBA 0.80% 8.78% 2.26%
RJA 6.93% 22.54% -4.87%

Let’s get into what investors really want to hear, performance. The past three years have watched RJA dominate the competition, as it has proven itself as one of the best in the business. But stretch that out to five years, and DBA has performed much better. Typically with ag investing, it is more helpful to look at longer time lines given that the industry can be very volatile in the short term; just look at what this summer’s severe drought did to grains [see also Why Jim Rogers Still Loves Agricultural Commodities].

There really isn’t a winner in this category, as both funds charge the same in fees and have won over different time periods. Some may take DBA’s long-term win as a sign that it is a better fund, while others may see RJA’s massive 3 year and YTD performance as a sign of a newcomer that is here to stay.

Which is Right For You?

So after all of that, the biggest question remaining is which fund is right for your investment objectives. It depends. If you are an active trader, or looking to establish a large position, there is no question that DBA is your go-to fund as RJA comes nowhere close to matching its liquidity. On the other hand, if you are looking to buy and hold for the long term, RJA’s diversity, ETN structure, and recent performance make it a better candidate.

Either way, investing in agriculture is generally agreed to be one of the most lucrative assets for the coming years, so it is hard to make a wrong decision with these two products. You will need to look at your strategy, and what you want out of an investment to help you choose between these two products.

Written By Jared Cummans From CommodityHQ  

CommodityHQ offers educational content, analysis, and commentary on global commodity markets. Whether you’re looking to speculate on a short-term jump in crude or establish a long-term allocation to natural resources, CommodityHQ has the information you need.


NYSE:DBA, NYSE:RJA


 

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