Though global economic growth is still hinged on the crisis in Europe and the sluggish U.S. job markets, rising food prices have become a major concern in the economies the world over.
The world food prices including cereals, oilseeds, dairy, meat and sugar are surging to new highs due to the scorching heat and the worst U.S. drought in nearly a half-century (read: Bet on Higher Food Prices with These Three ETFs).
The bad weather has also resulted in the worst wheat harvest since the late 1980s. In fact, harvest levels of this key crop dropped 14% on average this year further underscoring the issues that this corner of the market is seeing.
The cost of dairy costs jumped the most in more than two years. Livestock breeders and dairy farmers are now continuously passing on the increased cost of feed to consumers, suggesting there is still more hikes to come.
If that wasn’t enough, in June and July, a heatwave in Russia and a major drought in that key grain growing nature led to higher prices as well, as 45% of the corn and 35% of the soybean crop were destroyed (read: How Do You Invest for the Coming Crop Crisis?).
The hike in food prices forebodes gnawing hunger for a slice of the American population. Americans on lower incomes are consuming less food due to 30% appreciation in the prices of fruit, milk, cheese and egg.
Unfortunately, relief doesn’t appear to be coming anytime soon either, as according to a recent data from the U.S. Department of Agriculture, Americans expect to pay 3-5% more on groceries next year too.
In other words, there seems to be little relief in sight for high food prices. This is especially true with another round of monetary stimulus from central banks in many countries flowing into the markets, thus weakening the dollar and giving even more strength to commodity prices in the near term.
Investors concerned about the uptick in food prices, particularly if the drought continues and crop yields continue to plummet, might want to watch these four ETFs outlined below (see more ETFs in the Zacks ETF Center). These funds could be especially impacted by any continued trends in food prices, and particularly if prices continue to ascend in the near future.
E-TRACS UBS Bloomberg CMCI Food ETN (FUD)
Investors seeking a broad play on the food segment of the commodity market should find FUD an intriguing choice. Launched in April 2008, the product provides wide exposure to a portfolio of agricultural and livestock commodity futures through a single investment. The commodity futures contracts are diversified across three constant maturities from three months up to one year.
The note tracks the performance of the UBS Bloomberg CMCI Food Index Total Return index, net of fees and expenses. The fund holds 10 commodities in the basket, all of which can be classified as ‘softs’. Top holdings include sugar (24%), soybeans (19%) and corn (16%) while other in-focus commodities also make an appearance in the product as well (read: What Happened to the Sugar ETF?).
The product charges 65 bps in fees per year from investors. Despite the lower fees, volume is unfortunately quite bad in the note, coming in at about 7,700 shares a day.
This means that investors have to pay extra cost in the form of wide bid/ask spread. The ETN has posted remarkable performance so far this year, yielding over 9% returns (as of October 12) and attracted $27.9 million worth of assets.
iPath Dow Jones-UBS Livestock ETN (COW)
For investors seeking exposure to livestock, COW could a good choice. The product seeks to replicate the price and yield of the Dow Jones-UBS Livestock Subindex Total Return index, a sub-index of the Dow Jones-UBS Commodity Index Total Return index. The returns of the product are available through an unleveraged investment in the futures contract on livestock commodities.
The product puts roughly 70% of its exposure in live cattle contracts while lean hogs account for the rest of the portfolio. The note is quite expensive, charging 75 bps in annual fees from investors.
It is relatively liquid as it trades in volumes of 36,000 shares per day on average. The product was launched in October 2007 and has managed assets worth $54.6 million so far this year.
The product has had a lackluster performance, losing about 6% in the year (as of October 12). This suggests that investors still have time to get in on the note, especially if herd sizes continue to shrink and feed costs rise heading into the fall. The ETN retains a Zacks Rank # 1 or ‘Strong Buy’ rating, suggesting that the fund has more upside potential ahead this year.
PowerShares Dynamic Food & Beverage ETF (PBJ)
For investors believing that costs can easily be passed on to end users, and are seeking a concentrated play on the food and beverage segment from a stock perspective, PBJ could be an interesting pick (read: Time to Buy the Food and Beverage ETF?).
The fund tracks the Dynamic Food & Beverage Intellidex Index, which uses various investment criteria like price momentum, earnings momentum, quality, management action and value to include stocks in the list.
Launched in June 2005, the product holds 30 securities with AUM of $106.5 million. The fund puts nearly 46% in the top ten firms. Archer Daniels Midland (ADM), Coca Cola (KO) and Mondelez International (MDLZ) enjoy the top three positions in the basket. Large cap accounts for a substantial 46% share while mid and small cap account for the remaining portion of the basket.
About 91% of the portfolio goes to consumer staples companies while the rest goes towards consumer discretionary (read: The Comprehensive Guide to Consumer Staples ETFs). The ETF is relatively cheap when compared to its counterparts, charging 63 bps in fees per year.
Trading in good volume of about 48,000 shares per day, the product has tight bid/ask spread. The fund delivered impressive returns of over 4% year-to-date (as of October 12) and yields a decent dividend of 1.21% annually.
PBJ currently has a Zacks Rank # 3 or ‘Hold’ rating.
PowerShares DB Agriculture ETF (DBA)
Investors targeting agricultural commodities could choose DBA. Launched in January 2007, the fund seeks to replicate the price and performance of the DBIQ Diversified Agriculture Index Excess Return index plus interest income from treasuries, before fees and expenses.
It is one of the most popular and the largest fund in the commodity space. The fund is composed of futures contracts on some of the most liquid and widely traded agricultural commodities that trade on American markets.
The fund has a wide variety of 10 commodities in its basket. Top holdings include soybean (14%) and cocoa (13%) while the another three commodities - coffee, wheat and live cattle - make up 12% each as well (read: Cocoa ETFs: The Safe Haven in Agricultural Commodities?). The fund has amassed close to $1.9 billion in AUM and sees volume of over one million shares a day.
While the fund is expensive in the space charging 1.01% in annual fees, there is no extra cost involved in trading this popular product given its solid volume. The fund has gained only 0.10% so far this year (as of October 12).
DBA currently has a Zacks Rank # 2 or ‘Buy’ rating. This suggests that the ETF would outperform its peers over the upcoming one-year period.
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