2 ETFs for cautious investors
These funds rely on a buy-and-hold strategy in the often volatile agricultural sector.
By Don Dion, TheStreet
The agricultural industry started off this year on a strong note and continues to generate headlines regularly.
However, increasingly, this corner has become a choppy region of the market. With the divergence in crop prices, the full-steam-ahead mentality that defined much of the opening half of the year has begun to fall by the wayside.
Bullish agriculture investors will want to maintain a conservative stance on this industry in order to avoid being taken to the slaughterhouse. Clear evidence of the shaky action in the food industry can be found in "soft" commodities, such as coffee, sugar and cotton.
Since the start of May, sugar prices have been on a tear, powering along a nearly uninterrupted upward path. This dramatic rally has continued into July. Month to date, the futures-tracking iPath Dow Jones UBS Sugar Subindex Total Return ETN (SGG) has ascended nearly 15% to all-time highs.
As sugar prices have risen, cotton prices have not fared as well. This crop, whose steep rise during the closing months of 2010 and start of 2011 made it a darling among agriculture bulls, has seen a steep decline during the past few months. Since the start of April, the iPath Dow Jones UBS Cotton Subindex Total Return ETN (BAL) has tumbled as a result, retreating to levels last seen at the end of November 2010.
The action witnessed from sugar and cotton highlights the inherently volatile nature of single-crop commodity ETNs. On a number of occasions I have warned that, while these products can be wildly attractive during times of strength, the pendulum swings dramatically in both directions. Investors caught with heavy exposure to these products when they turn south can suffer gut-wrenching losses.
It is difficult to determine what's next for individual crops, and often products like SGG and BAL can find themselves jockeying between big daily gains and losses. With a keen eye and plenty of patience, an agile, risk-tolerant trader may be able to harvest some strength from these products, while investors with a weaker stomach for risk will want to look elsewhere for agriculture exposure.
The two funds take markedly different approaches. Whereas like SGG and BAL, DBA tracks a basket of crop futures contracts, MOO provides investors with exposure to the largest and most recognizable companies dedicated to providing the farming industry with chemicals, equipment and other goods and services. Top holdings include Potash of Saskatchewan (POT), Deere (DE) and Monsanto (MON).
The ample diversification that comes with using DBA and MOO to satisfy agriculture demand will help shield the fund against roller-coaster action. However, there is a trade-off. As evidenced by the two funds' action month to date, their respective growth is noticeably restrained. During this period, DBA has jumped less than 2%, while MOO is up 7%.
I am confident that the food industry will remain in the headlines as expanding nations work to feed their growing populations. Harvesting gains from this sector, however, may prove challenging.
Single-crop commodity funds like SGG and BAL can cause headaches for risk-adverse investors. Those looking to take a buy-and-hold approach to this region of the market will be best off setting aside a small chunk of their portfolio to a well-diversified option like DBA or MOO.
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Serious issues like drought and the deterioration of the developed world spell opportunity for this industry leader.
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