For investors looking to achieve exposure to agricultural commodities through ETPs, two of the most popular options on the market are the PowerShares DB Agriculture Fund (DBA) and iPath Dow Jones-UBS Agriculture ETN (JJA). On the surface, these two products may seem to be similar; both offer broad-based exposure to ags using futures contracts through the exchange-traded structure. But a look at the year-to-date performance figures indicates that they are far from identical; DBA is up about 4% so far in 2012, while JJA has added 19%–a massive gap between two generally similar products.
Under The Hood
So what’s to blame for the significant delta between the two agriculture ETPs? It’s all a matter of the underlying portfolios, which have very different allocations to a number of key commodities. DBA casts a considerably wider net than JJA, including about 11 different futures contracts compared to only about seven for JJA. Most notably, DBA includes an aggregate allocation of about 25% to cattle and hogs, while JJA focuses exclusively on the “non-animal” segment of the market.
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That allocation to livestock in DBA has been a major contributor to the distance relative to JJA in 2012. Livestock prices have been relatively soft this year, with the Livestock ETN (cleverly named COW) losing about 7% so far this year. Conversely, prices for corn, soybeans and grain have been skyrocketing thanks to less-than-ideal growing conditions resulting from scorching temperatures. The Grains ETN (JJG) has added about 37% this year. So it makes sense that JJA, which allocates about 80% of its holdings to corn, wheat, soybeans and soybean oil, has the edge on another ag ETF that makes meaty allocations to pigs and cows.
The lesson for ETF investors, as always, is to take a long look under the hood before making a purchase. Products that appear similar at first often have meaningful differences, and the name of an ETF doesn’t always tell the full story. As the gap between DBA and JJA shows, the devil is in the details.
Of course, neither strategy is necessarily superior to the other–they’re simply different. While the big jumps in grains prices have allowed JJA to turn in the better performance so far in 2012, under different circumstances (i.e., when livestock is in a bull market), DBA will have the upper hand. It is worth noting, however, that the grains-centric strategy implemented by JJG has performed far better over the past three years; JJA is up about 56% during that period compared to only 18% for DBA.
Disclosure: No positions at time of writing.