Livestock Funds ‘Slaughtering’ Other Agricultural Commodity ETFs

by on June 10, 2010 | ETFs Mentioned:

With the U.S. dollar soaring as of late on a wave of risk aversion, most commodities, which are usually priced in greenbacks, have suffered greatly as rising local prices have curtailed international demand. This is reflected in the recent performance of the PowerShares DB Agriculture Fund (DBA), the largest and most liquid ETF in the Agricultural Commodities ETFdb Category; DBA is down about 12% this year and about 17% over the past 52 weeks (see the Ten Worst Performing ETFs of 2009).Despite this downtrend trend, one sector of the agricultural commodity category has managed to stay above water thus far in 2010; livestock. Livestock funds, which generally consist of holdings in lean hogs and live cattle, have managed to eek out gains this year despite weakness in virtually every asset class. The reason for this impressive performance is likely twofold. First, lean hog futures have been trending upward as swine flu fears have abated which has helped to increase demand for many pig products. Additionally, frozen pork in storage has been declining as well which has also helped to keep prices higher.

Meanwhile, the other major component of livestock funds, beef, has trended upwards as well. This came after figures suggested that cattle production worldwide has been relatively flat and it seemed to have peaked in 2007 at 58,898 (1,000 MT, CWE) before decreasing to 57,648 in 2009. This seems likely to be a result of lower beef production in Brazil and Argentina, which has not been offset by the growing beef producers in the EU and China. This has sent beef prices from roughly 87 cents in January up to 94 cents in late April before beef prices sold off and fell below the 89 cent mark this week, still respectable considering the dips that many other commodities have been experiencing. Below, we profile both of these livestock focused ETNs that have managed to buck the downward trend thus far in 2010 (read the Ultimate Guide to Agricultural ETFs).

iPath DJ-AIG Livestock Total Return Sub-Index ETN (COW)

COW tracks the Dow Jones-UBS Livestock Subindex Total Return, a benchmark composed of two livestock commodities, lean hogs and live cattle, which are traded on U.S. exchanges. As its symbol might suggest, COW has a heavy allocation towards cattle, which comprises 63.5% of the fund compared to just 36.5% for lean hogs. The fund remains an excellent option for investors seeking diversification away from stocks or bonds; it has a correlation with the S&P 500 of just 0.16 and a correlation of 0.04 with the Barclays Capital U.S. Aggregate Bond Index (see more information about COW’s holdings on its fact sheet).

E-TRACS UBS Bloomberg CMCI Livestock ETN (UBC)

UBC trakcs the UBS Bloomberg CMCI Livestock Index Total Return, which measures the collateralized returns from a basket of futures contracts representing the livestock sector. The commodity futures contracts are diversified across two constant maturities of three months and six months. This fund is more evenly weighted than its counterpart and has 55.6% in cattle and 44.4% in lean hogs. In terms of maturity dates, 73.4% of the fund’s holdings mature in three months while 26.6% matures in six months. The fund, which charges an expense ratio of 0.65%, is up 2.8% thus far in 2010 and is up 2.6% over the past 52 weeks (see technical analysis of UBC here).

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Disclosure: No positions at time of writing.