Over the past few years, investors have seen the introduction of ETFs targeting increasingly specific niches. Much of this growth has come in the commodity ETF arena, with many new funds investing in futures contracts in order to provide investors exposure to a specific resource or broad basket. Institutions and individual investors alike have embraced these products as a way to obtain exposure to an otherwise hard-to-access asset class that can provide valuable diversification benefits. These products have helped to fuel an ETF growth spurt while also significantly expanding the size of the investable universe.
The most popular exchange-traded commodity products tend to be either precious metals funds or ETFs offering exposure to a broader basket of resources. But interest in single-commodity funds has been on the rise, with investors finding uses for everything crop copper to sugar in their portfolios.
Some investors have embraced commodity exposure as a way to play more general global trends. Platinum and palladium offer a way to bet on a continued turnaround in the automotive industry. Copper can serve as a bet on a resurgence in the homebuilding sector. And exposure to corn can allow investors to bet on a continued expansion of the country’s ethanol industry in coming years.
Alternative energy options have been in focus as of late as the fallout from the oil spill in the Gulf of Mexico prompted the Obama administration to renew its pledge to reduce dependence on foreign oil. In addition to solar and wind power, an increasingly popular alternative fuel choice in the U.S. is ethanol derived from corn. Currently, as much as one-third of all the corn produced in the U.S. is turned into ethanol; this increased demand for the commodity has kept the price of corn above the $2.50/bushel level since 2006, when ethanol originally burst onto the scene.
For investors looking to bet on a continued ethanol boom, exposure to corn is an interesting option. Below, we profile two exchange-traded product that offer exposure to some of the most important crops related to ethanol production in the U.S. [also see Definitive Guide To Clean Energy ETFs].
Corn Fund (CORN)
CORN is a new fund from Vermont-based Teucrium, a firm that has plans to offer a number of additional single-commodity funds. The fund invests in corn futures traded on the CBOT, and does so in a way that is far different from strategies used by most other commodity funds. CORN is designed to reflect the daily changes in percentage terms of a weighted average for three futures contracts for corn: 35% weighting for the second-to-expire contract, 30% weighting for the third-to-expire contract, and 35% weighting for the contract expiring in the December following the expiration of the third-to-expire contract. So CORN doesn’t “roll” all of its holdings every month, potentially reducing the impact of contango on price when the futures curve is sloping upwards [see Inside The Corn ETF]. The fund has been around for a little less than a month and has been off to a rough start; it is down 2.5% since its inception and has posted a loss of 7.1% over the past week [see more fundamentals of CORN here].
ELEMENTS MLCX Biofuels ETN (FUE)
FUE is an exchange-traded note linked to the MLCX Biofuels Index Total Return, a benchmark that consists of futures contracts on physical commodities that are either biofuels themselves or feedstock commonly used in the production of biofuels. Since the index is a total return index, it is designed to reflect the performance of a fully collateralized investment in the index components. According to the fund’s prospectus, FUE is heavily weighted in soybeans (32.7%), corn (21.1%), soybean oil (19.5%), and sugar (15.7%), which are among the most liquid in the agricultural commodity realm. FUE has had a rough 2010 thus far, posting a loss of about 15% [see technical analysis of FUE here].
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Disclosure: No positions at time of writing.