Exchange-traded funds (ETFs) that provide exposure to the agriculture sector generally either include an array of agriculture equity securities or they invest in futures contracts on specific commodities. Agriculture ETFs remove some difficulty for investors who wish to gain exposure to the sector. Rather than investing in and managing multiple equity security or futures contracts positions, investors can use ETFs to purchase a basket of these types of agriculture-related securities.
Investors who wish to gain exposure to the agriculture sector may want to consider an investment in the PowerShares DB Agriculture Fund (NYSEARCA: DBA) or the United States Agriculture Index Fund (NYSEARCA: USAG), both of which track agriculture indexes and hold various commodity futures contracts.
PowerShares DB Agriculture Fund
The PowerShares DB Agriculture Fund was issued by Invesco PowerShares on Jan. 5, 2007. As of March 24, 2016, the fund had total net assets of $673.2 million and held 11 futures contracts on agriculture commodities, ranging from cocoa to soybeans. This fund charged an average annual net expense ratio of 0.71%, as of March 2016, which was low compared to the average annual expense ratio of 2.71% in its category of commodities agriculture funds.
DBA is an index fund that seeks to provide investment results corresponding to the DBIQ Diversified Agriculture Index Excess Return, its underlying index, in addition to any interest income generated from the fund's holdings in U.S. Treasury securities. To achieve its investment objective, the fund primarily invests in futures contracts on agriculture commodities included in its underlying index. DBA uses a rules-based methodology to roll its futures contracts as they approach maturity, in an attempt to minimize the effects of contango.
As of Feb. 29, 2016, DBA had an average annual volatility, or standard deviation, of 12.1% over a trailing three-year period, while its category average was 19.82%. Over the same period, it had an average annual return of negative 8.87%, while its category had an average annual return of negative 11.91%. As of Feb. 29, 2016, DBA had an up-market capture ratio of 62.03% and a down-market capture ratio of 48.75%, over the past trailing three-year period, when measured against the Morningstar Long-Only Commodity Total Return USD Index, the standard index. Therefore, it has significantly underperformed in up markets and has lost less than the standard index in down-markets.
Although the fund has historically experienced a lower degree of volatility than its category, the speculative nature of derivative securities may cause large losses. Therefore, the PowerShares DB Agriculture ETF is suitable for highly risk-tolerant investors who understand the mechanics of commodity futures and wish to gain exposure to DBIQ Diversified Agriculture Index.
United States Agriculture Index Fund
The United States Agriculture Index Fund was issued on April 13, 2012, by the United States Commodity Funds. As of March 28, 2016, USAG had approximately $1.99 million in total net assets and charged an annual net expense ratio of 0.80%, as of March 2016. USAG is similar to the PowerShares DB Agriculture Fund, and it seeks to track investment results corresponding to its underlying index plus interest income earned from its holdings. However, USAG's underlying index is the SummerHaven Dynamic Agriculture Index Total Return. The underlying index includes 14 agriculture futures contracts that are selected based on quantitative analysis.
As of March 28, 2016, USAG holds futures contracts traded on the ICE Futures UC, the Chicago Board of Trade, the Kansas City Board of Trade, the Chicago Mercantile Exchange and the ICE Futures Canada. The contracts are in 14 agriculture commodities, which range from feeder cattle to canola. Similar to DBA, USAG selects its holdings based on the futures curves. However, USAG also considers pricing signals, and the supply and demand of its holdings.
As of Feb. 29, 2016, based on trailing three-year data, USAG had an average annual standard deviation of 12.14% and return of negative 7.97%. Over the same period, it had an up-market capture ratio of negative 36.51% and a down-market capture ratio of 13.42%, when measured against the index. This indicates that USAG has had negative returns during up markets. However, it has lost less than the standard index in down markets. USAG has similar characteristics and volatility statistics to DBA, and therefore, USAG is suitable for speculative sophisticated investors.