Commodity ETFs have become tremendously popular in recent years, offering exposure to an asset class that has historically been difficult to access in a cost-efficient manner. While investors seeking to add non-correlated assets to a traditional stock-and-bond portfolio generally gravitate towards funds comprised of a basket of different commodities, a number of more targeted commodity products present an opportunity bet on changes in prices of individual resources–everything from coffee and cocoa to tin and lead. Most of these ETFs can be rather volatile, leading many to shy away. But commodity ETFs can be used to take advantage of some of markets that some believe hold tremendous short-term promise [see also Closer Look At The “Contango Killer” Commodity ETF].
One interesting investable asset is cattle–or more appropriately, cattle futures. Cattle spiked in August, closing close to record highs before retreating somewhat in recent sessions. The rise of this particular commodity’s price has left some investors scratching their heads; it seems improbable that beef prices would rise during a time where consumers are scaling back, but there are several logical reasons for the surge. For starters, the Department of Agriculture predicted that the consumer price index for food will increase 2% to 3% in 2011. The same group is also forecasting that food prices would grow faster than inflation in 2012, creating a positive outlook for commodity prices. Finally, food expenditures in the U.S. are projected to continue to climb in coming years, rising to about $1,618.7 billion in 2019, up from $1.139 billion in 2009.
Markets outside of the U.S. bring even more promise for commodities overall. Over the years, emerging market demand increase has coincided with the exponential growth that many of these nations are experiencing. Current world population of roughly 7 billion is expected to hit 9.1 billion by 2050, with the majority of this growth coming from developing nations. That translates into more mouths to feed, a trend that will have obvious ramifications for global food demand [see also Livestock Funds ‘Slaughtering’ Other Agricultural Commodity ETFs].
While many commodity prices are benefiting from overseas demand, beef, in particular has seen growth. The rise in beef prices is mainly due to growing demand in Asia; a demand that has grown so quickly that the U.S., the world’s largest beef producer, cannot keep up. This supply shortage has only further lifted cattle futures. The low supply and heavy demand gap may leave room for the commodity to experience a price fallout if global demand is met, but some suggest that it may take years to do so [see also The Perfect Storm For The Corn ETF?].
For investors seeking to make a play on the possible rise of cattle futures, we outline two ETF options:
iPath DJ-UBS Livestock ETN (COW)
This ETN is linked to an index composed of two livestock commodities contracts (lean hogs and live cattle) traded on U.S. exchanges. Cattle futures account for 60% of the portfolio, making this fund an ideal play to take advantage of a cattle price growth [see more on COW's fact sheet]. This ETN has gained about 6% so far this year.
E-TRACS UBS Bloomberg CMCI Livestock ETN (UBC)
This ETN has a very similar makeup as COW, but investors should take note of key differences. UBC is linked to the the UBS Bloomberg CMCI Livestock Index Total Return, which measures the collateralized returns from a basket of futures contracts representing the livestock sector. Unlike COW, the commodity futures contracts are diversified across two constant maturities of three months and six months. This ETN also has a relatively low trading volume compared to COW, which may not be ideal for investors looking for a more liquid option. UBC is made up of 56% live cattle and 44% lean hogs futures. UBC has outperformed COW, posting gains of nearly 10% this year.
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Disclosure: Photo courtesy of Daniel Schwen. No positions at time of writing.