Does the world need another agriculture fund?

The launch of an all-new ETF focused on agricultural commodities has won its share of hoopla in the market press, but with a crowd of funds already jostling for subscriptions, is the U.S. Commodity Agricultural ETF (USAG, quote) unique enough?

As others point out, USAG tracks a broader basket of foodstuffs than the entrenched leader in the category, the PowerShares Deutsche Bank Agricultural ETF (DBA, quote).

It’s true. USAG’s underlying index is open to additional allocations for soy meat, soy oil and canola, in addition to the more familiar wheat, corn, soybeans, livestock contracts and tropical exotics found in DBA.

The question is what that added dollop of oilseeds and animal feed does for USAG and how traders can best take advantage of the slightly altered portfolio.

Unfortunately, it’s hard to know exactly how USAG allocates its funds. The index it’s based on is dynamic, so the weights are always changing on a monthly basis.

On a base level, the three “extra” commodities account for 12% of the new fund. Counting the 12.5% base weighting to soybeans, USAG starts to look like an oilseed-heavy version of DBA.

Figure soy, derivatives and canola account for 24% of USAG. Cattle and hogs bring in another 19%, corn and wheat are 24% and the other 32% of the fund is invested in the tropicals: coffee, sugar, cocoa, cotton.

DBA, on the other hand, only has the 12.5% allocation to soybeans, making up the difference with heavier investments in livestock and the tropicals.

Naturally, the USAG weightings may shift by 2% in either direction per commodity, so we could imagine periods where the gap between it and DBA is minimal — or when holdings in livestock and grain drop off to exaggerate the difference.

Right now, however, traders who want to deepen their bets on relative luxuries like coffee, meat and chocolate may find that DBA better suits their needs.

Whether pressed for cooking oil or thrown to hogs, soy is lower down the food pyramid and so USAG should be considered accordingly. 

That said, the recent rally in the soybean market has been good for USAG, at least as far as hypothetical returns go.

Going back to 2002, USAG’s soy-heavy portfolio would have generated an average return of 9.74% a year, versus the DBA index earning more like 8.03% a year over the course of the decade.

If that relative performance holds up, USAG ends up justifying its higher expenses by a margin of about 1.1% a year. 

That may be worth it to soy-hungry traders to chase, but until USAG gets the liquidity on its side, they might be better served simply adding a satellite position in the Teucrium Soybean fund (SOYB, quote) to a DBA core.

As yet, SOYB has amassed twice as much capital as USAG and prints about 60% more turnover.

Sure, USAG is still extremely young and has the U.S. Commodity Funds marketing machine behind it, but SOYB isn’t exactly easy to trade — and it’s still running rings around USAG in these early days.

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