IndexIQ, the ETF issuer best known for its lineup of hedge fund replication and county-specific small cap ETFs, announced the launch of a new fund today targeting an increasingly popular and relevant corner of the global equity market. The Global Agribusiness Small Cap ETF (CROP) will track the IQ Global Agribusiness Small Cap Index, a benchmark that provides exposure to global small cap companies engaged in the agribusiness sector, including crop production and farming, livestock operations, agricultural supplies & logistics, agricultural machinery, agricultural chemicals, and biofuels.
This new fund will hold about 50 securities in total, spreading exposure across both U.S. and international companies. At launch, the fund looks to be tilted towards companies that are in the crop production & farming segment (30% of holdings), followed by agricultural supplies and logistics (23%). Agricultural machinery and livestock operation firms also make up double digit weightings, while biofuels and agricultural chemicals both make up less than 10% of the fund’s total assets.
Of the universe of companies operating within the agribusiness sector, the bottom 10% of the market capitalization is eligible for inclusion in the underlying index. Additionally, to avoid having one security dominate the holdings of the fund, a 10% single company cap is applied for quarterly rebalances [see What Every Investor Should Know About Commodity ETF Investing].
Appeal of CROP
CROP may be appealing to investors looking to bet on continued increases in prices and demand for food across the world. As the global population continues to increase and ongoing urbanization in emerging markets causes the middle class to swell, demand for agricultural commodities has skyrocketed. This trend is perhaps best evidenced by the wave of protests throughout the Middle East in recent months; many of these uprisings evolved into pushes for democracy, but were initially sparked by crop shortages and runaway inflation among food prices.
The premium for robust harvests has never been greater, pushing many farmers to increase usage of chemical and mechanical techniques in order to bring in the largest crop and maximize profits while prices for their products remain elevated. “Global supply shortages, changing dietary demands in emerging markets, growing populations, and alternative energy production are among the many powerful factors driving global demand and skyrocketing prices for agribusiness products. We believe these trends are likely to persist for the foreseeable future,” said Adam Patti, chief executive officer at IndexIQ in a press release. “In our view, small capitalization companies are best positioned to translate this demand into significant growth. They are under-represented in other investment options, are typically faster growing and, in many cases, are undervalued relative to mega-cap multi-national companies, making them attractively positioned for growth and for acquisitions by the larger global players.”
CROP is the third agribusiness ETF to hit the market, joining the Market Vectors Agribusiness ETF (MOO) and the PowerShares Global Agriculture Portfolio (PAGG). Unlike the existing agribusiness ETFs, CROP will focus exclusively on small cap companies–making the new product a potentially nice complement to either MOO or PAGG. CROP is priced favorably relative to the large cap heavy funds; the underlying index maintains a lower earnings multiple and a higher dividend yield.
Innovation in the ETF space has popularized a strategy that establishes exposure to commodity prices through investments in stocks of companies engaged in the extraction or production of the resources. There are now close to 30 ETFs in the Commodity Producers Equities ETFdb Category, including both broad-based funds such as HAP and more targeted products offering exposure to a specific sector or even a single commodity. Achieving exposure through equities allows investors to utilize securities with identifiable cash flows, and also avoids the nuances of futures-based strategies that can be eroded by contangoed markets. There are 11 ETFs in the Agricultural Commodities ETFdb Category, including the ultra-popular DBA and resource-specific funds such as CORN [also read the Ultimate Guide To Agricultural ETFs].
The new fund will charge an expense ratio of 0.75%, within the upper half of the Commodity Producers Equities ETFdb Category.
Disclosure: No positions at time of writing.