There are three primary exchange-traded funds (ETFs) that provide investors access to the livestock industry: the iPath Dow Jones-UBS Livestock Subindex Total Return ETN, the UBS ETRACS CMCI Livestock Total Return ETN and the iPath Pure Beta Livestock ETN.
These three are all actually exchange-traded notes (ETNs. ETNs are mentioned synonymously with ETFs, even though there is a significant difference in their structure. ETNs are commonly listed as ETFs. With an ETN, there is a credit risk that the issuer of the note may default. However, the actual default rate on ETNs is extremely low.
The Livestock Industry
Livestock includes any domesticated animal that is raised to produce some type of commodity. The primary livestock on which futures contracts are traded are cattle and hogs. The livestock futures market is used primarily by producers to hedge their risk exposure, but it does carry enough volume for regular traders to take part.
Exchange-Traded Funds Vs. Exchange-Traded Notes
Though they are often used as interchangeable terms and ETNs are generally classified as ETFs, there is a difference between the two. Both are structured to track underlying assets, both typically have a lower expense ratio than actively managed mutual funds and both trade like stocks on major exchanges.
The difference between the two is internal. ETF investors invest in a fund that holds the assets that it tracks. An ETN is more like a bond. It is a debt note that is unsecured and issued by an institution. It is good practice for ETN investors to research the issuer's credit rating.
The iPath Dow Jones-UBS Livestock Subindex Total Return ETN (COW)
The iPath Dow Jones-UBS Livestock Subindex Total Return ETN is a subindex of the Dow Jones-UBS Commodity Index Total Return. It reflects potential returns that may be available through unleveraged investments in futures contracts on the physical commodities which comprise the index. It also includes the interest rate that may be earned on the cash collateral that is invested in specific Treasury bills. This ETN has an expense ratio of 0.75%. Investing in the COW fund allows investors to avoid company-specific risk.
The underlying index seeks to match returns available when investors purchase futures contracts in livestock markets, which consist of hogs and cattle. The index is composed of two front month contracts, and it provides investors a return on a collateralized investment in short-term U.S. Treasury bills (T-bills).
The UBS ETRACS CMCI Livestock Total Return ETN (UBC)
The UBS ETRACS CMCI Livestock Total Return ETN reaches maturity on April 5, 2038. It is composed of senior unsecured debt securities issued by UBS AG, which offers and sells the medium-term notes Series A of Exchange Traded Access Securities. This ETN is structured to track the UBS Bloomberg CMCI Livestock Index Total Return performance. This ETN has an expense ratio of 0.65%. Its risk level is average for commodity futures funds.
The subindex measures collateralized returns from a basket of livestock futures contracts. It is structured to represent the liquid forward curve of each commodity trading month. This fund is considered a medium-risk commodity fund investment.
The iPath Pure Beta Livestock ETN (LSTK)
The iPath Pure Beta Livestock ETN is tied to the Barclays Capital Commodity Index Livestock Pure Beta Total Return. It is a subindex, and it reflects returns that are potentially available to investors through unleveraged investments in two futures contracts on livestock commodities traded on U.S. exchanges. This ETN has an expense ratio of 0.75%. It is rated as moderate risk.
The index consists of two futures contracts with uncommon roll structures. This structure utilizes the Pure Beta Series 2 Methodology to select contracts. This strategy seeks to minimize contango and also offer investors returns from U.S. T-bills.
Any of these funds are suitable for speculative investors willing to accept the generally higher risk level associated with commodity futures related investments, but who prefer a stock exchange-traded instrument such as an ETF for exposure to the livestock market.