All eyes are on grains—especially corn—as extreme weather and ongoing trade tensions have caused plantings in the Midwest to greatly lag historical records. Prices of agricultural commodities have risen, offering opportunities in single-commodity ETFs, like the Teucrium Corn Fund (CORN), which allow traders to play the space with ease.
ETF.com recently chatted with Grant Engelbart, senior portfolio manager and director of research for CLS Investments. He follows the grains complex closely, and explained how he uses CORN and other commodity ETFs inside CLS' client portfolios, worth $9.2 billion.
ETF.com: We've been covering the grain space quite a bit on ETF.com lately. (Read: "Floods & Tariffs Lift Grain ETFs"; listen: "ETF Prime Podcast: Grain Funds Pop.") You’ve also increased your allocation to corn ETFs recently. Why do you find CORN [the Teucrium Corn ETF] to be a compelling trade at the moment?
Grant Engelbart, CLS Investments: Generally, we're asset allocators. We're not all that tactical; we take a consistent amount of risk and make sure it's balanced in our portfolios.
That leads us to use many different asset classes, particularly those with strong diversification properties. As of late, that's been hard to find, but agricultural commodities tend to be driven by [fundamentals] completely diversified from the stock market, like weather conditions.
We're value investors as well, so we're constantly scouring the world for attractive value. When we look at an asset class like agriculture, one that’s been beaten down for years, we see compelling prices relative to their inflation-adjusted average prices.
Here in the Midwest—we're located in Omaha, Nebraska—we've started to see changes in the supply/demand characteristics of the market that have led us to say this is attractive from a long-term perspective.
So we've invested in broad agriculture in general. We also use WEAT [the Teucrium Wheat Fund].
ETF.com: Generally, you maintain a consistent commodity allocation, then.
Engelbart: Yes, internally we use an asset allocation benchmark that includes a 5% commodity allocation. Within that, we could own broad commodities or get more nuanced. ETFs allow us to do that easily.
ETF.com: Have you shifted your positions within that allocation from other single-commodity ETFs or from other diversified commodity exposure to CORN and WEAT?
Engelbart: It's kind of a combination of both. We've taken exposure from our existing commodity allocations and shifted it into corn, but we're also adding a little bit more to the asset class in general. We've taken a little bit from equity and fixed income, but we keep our risk consistent as we reallocate.
ETF.com: For you, this is a short-term call. But how short term is that? Is this something you'll reevaluate by the end of the summer? By the end of the year? By the end of next Tuesday?
Engelbart: Generally, we maintain three- to five-year allocations, so this would be shorter than that. It's more tactical, from our standpoint. But I'd say [we'd hold] through the end of the harvest season. There's speculation, but not a ton of hard facts, about these commodities until specific agricultural reports come out, so we'd want to see those first.
Realistically, though, it's about a year’s play through the harvest and until the supply/demand dynamics fully shape out.
ETF.com: You mentioned CORN and WEAT. Do you use any other pure-play single-commodity ETFs, whether in the grain complex or in a different sector?
Engelbart: We also use the broad ag fund, DBA [the Invesco DB Agriculture Fund]. But it depends. We have a lot of different portfolios, so it depends on how specific we want to get with each client's account and how much risk they're willing to take.
ETF.com: Why DBA, versus other ETFs or ETNs that also give you diversified exposure?
Engelbart: We have a series of mutual funds that hold much of our commodity ETFs; the fund then is responsible for the K-1 tax form that comes with the three ETFs I mentioned. When we allocate for client portfolios outside those funds, we become much more cognizant of the K-1.
Nobody really likes them, because they come too late, and it's just a headache for clients. Many of our clients have said, "We don't want K-1s; I don't care what we need to do."
So in that case, we'll use something like RJA [the Elements Rogers International Commodity Index-Agriculture TR ETN]. It gets into some pretty esoteric commodities, but still gives us that exposure. We use ETNs, which have a little more favorable tax treatment.
You know about DBC and PDBC [the Invesco DB Commodity Index Tracking Fund and the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF, respectively. Author's note: PDBC offers effectively the same exposure as DBC, but structured such that it avoids issuing a K-1 form]. If Invesco would make a "PDBA," if you will—a K-1 free version of DBA—that would probably be our preferred vehicle inside of client accounts.
ETF.com: CORN and WEAT can be expensive funds to own and trade. Are you concerned about the cost of ownership? How do you factor it into your trading decisions?
Engelbart: Well, there are a couple things about the expense ratio. The sponsor fee—or how much Teucrium is actually getting—is actually 1%. What's listed gets into the 3’s. [Author's note: ETF.com lists CORN's expense ratio as 3.65%]. That makes us cringe. But it's not accounting for the futures collateral that's offsetting that expense ratio. When you offset that, you get a much more reasonable expense ratio.
From a trading perspective, we haven't had any issues getting in or out of the product, given the liquidity of the futures market underneath it. Teucrium did a good job structuring the product to hold liquid futures contracts.
It holds the second month, the third month and the next December, which generally has a pretty liquid contract. ETF.com even gives it a 5 out of 5 from a trading [block liquidity] perspective, last time I checked.
Like anything in the commodity space, obviously you've got to make sure you understand the product completely before you trade.
Contact Lara Crigger at firstname.lastname@example.org
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