Food ETFs In Focus On Deal Wave
While many staples companies have been hard hit in the latest round of sector rotation, firms engaged in the production or distribution of food have held up better than most. These haven’t been as bid up as many of their consumer product counterparts, and more importantly, the space has seen a wave of M&A (mergers and acquisitions) activity take place as well.
In particular, Shauanghui of China announced a takeover of America’s leading pork producer Smithfield (SFD). This $7 billion offer led to SFD shares jumping over 30%, pushing the stock to multi-year highs in the process.
Meanwhile, rumors of a similar takeover helped to boost Pilgrim’s Pride (PPC) in recent trading sessions too. In fact, in one day, the stock rose by over 20%, thanks in part to rumors, but also a sharp increase in price targets by an analyst as well (also see 3 ETFs for Insatiable Global Food Demand).
Clearly, investors are starting to pay attention to this space, and are banking on China’s insatiable demand for food products, especially as its population grows richer and starts demanding more meat products. While we have already started to see this take place, some believe that this trend has plenty of room to run.
“While it would appear that substantial room exists for productivity gains to sustain domestic market advantage, constraints of land, water and even rural farm labor appear to limit future supply,” said the FAO and OECD report, according to the FT.
Industry Rank Favorable
We are also seeing some solid figures on an earnings estimate front for the industry as well. The Food-Meat Producers industry is currently in the top 20 for Zacks Industry Ranks (out of 261), restaurants also have a favorable rank at 53, while food diversified is at 56. So clearly the industry is also well positioned from this earnings look as well (see the Zacks ETF Rank list here).
With this backdrop, investors who do not want to abandon staples may want to consider taking a closer look at food stocks as a solid play. While a single stock approach could be an interesting choice, an ETF approach could be even better as it ensures that you don’t miss out on the big gainers while still tapping into the positive trends in the space.
For investors seeking to apply this approach to their portfolios, we have highlighted two food ETFs below which could definitely benefit from this trend and could be interesting picks for those seeking some top notch exposure in an otherwise out of favor sector:
PowerShares Dynamic Food and Beverage ETF (PBJ)
This ETF tracks the Dynamic Food & Beverage Intellidex Index, a benchmark that follows about 30 companies in the food and beverage industry. Exposure is a bit pricey at 63 basis points a year, but assets under management and average daily volume are decent, suggesting minimal additional trading costs.
Packaged food product companies take up just over half of the assets, followed by restaurants, food retail, and beverages. Large caps account for about half the total, though the rest is devoted mostly to small and micro cap securities (see Four Ways to Play Rising Food Prices with ETFs).
This fund could benefit from the aforementioned trends thanks to some big food producers in its basket, as well as strong—and highly ranked—companies in other sectors like restaurants. Given this, PBJ could be a relatively safe way to access the good trend in the food space, while also playing the some other tangentially related sectors as well.
IQ Global Agribusiness Small Cap ETF (CROP)
Another choice for investors is CROP, a little known ETF that follows the IQ Global Agribusiness Small Cap Index. This benchmark focuses on about 55 small agribusiness firms, charging investors 75 basis points a year in fees. Additionally, volume and assets are light, so there may be wider bid ask spreads on this ETF.
Packaged food companies once again account for just over half the portfolio, though the rest is skewed towards other segments like agricultural farming, and industrial engineering. As you might expect from the small cap name, large caps are pretty much nowhere to be found, leaving pint sized securities to take up the bulk of the assets (read Play Four Megatrends with These ETFs).
This ETF could be a big winner from the trends in the food market thanks to its focus on small securities, as these are usually the top takeover targets for mega and large cap firms. Plus, the top holding is SFD, so the product has already started to benefit from the takeover trend, and the strong earnings picture, that is present in this surging industry.
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