Earlier this week, we at ETF Database had the pleasure of attending the Global Grains North America conference in Chicago. The event was packed with experts from the grains and oilseeds community. I had the honor of serving as a panelist speaker, discussing the basics behind commodity ETPs and more specifically the current grains ETF lineup.
The conference was an eye-opener in two major ways. First and foremost, it showcased how ETF education remains a big hurdle for many professionals, even for those operating in the financial services industry. Many industry experts would benefit from having a deeper understanding of how ETFs work and the various ways they can be utilized.
Secondly, the content presented during the conference illuminated a number of compelling points that made the case for investing in grains ETFs amid the current economic environment. Below, we’ll take a look at two of those reasons for adding grains ETFs to your portfolio.
Grains Offer Low Correlation to Stocks
At the moment, many in the financial world are predicting low single-digit or negative equity market returns for U.S. stocks in the coming years. If there’s any truth to these predictions, then investors overexposed to domestic stocks will pay dearly.
With that in mind, there’s always a need for asset classes that offer low correlations to the domestic equity market as investors seek to build out well-diversified portfolios. The introduction of niche ETFs offering exposure to previously difficult-to-reach corners of the market, such as emerging market bonds or foreign currencies, has served as a viable solution for adding uncorrelated sources to equity-heavy portfolios. At the same time though, one corner of the commodity market hasn’t received the attention it deserves when it comes to low-correlation assets.
Enter grains. See image below, courtesy of Teucrium:
The takeaway from the above chart is clear; among all the major commodities grains offered the best potential over the past 20 years for generating uncorrelated returns with regards to the S&P 500. Investors wary that U.S. stocks will take a dive later this year or next year can add grains ETFs to their portfolio to dampen volatility in the event of a steep correction on Wall Street.
What's the Upside Potential?
The single most fundamental tailwind for grains ETFs is hard to ignore: an ever-increasing world population, which leads to an ever-increasing appetite for food products. Population growth, especially in the developing world, is a key driver of grains demand. Suffice it to say, we don’t require too much evidence in order to see that an increasing population across the globe will lead to increasing consumption of products that rely on grains; and don’t forget that meat products also rely on grains for feed.
From a technical perspective, the upside potential for grains ETFs is equally obvious. Corn, wheat, and soybean prices have been severely beaten down over the trailing one-, two-, and three-year periods; more specifically, the only ETFs available that offer direct exposure to those commodities, (CORN ), (WEAT ), and (SOYB ) respectively, are all trading at 52-week lows. In short, all three of these ETFs offer lucrative risk/reward profiles at the moment for those willing to stomach the volatility inherent to commodity-based ETPs.
The Bottom Line
Grains ETFs warrant a closer look under the hood for two key reasons; first and foremost, grains have historically offered a low correlation to U.S. equities in comparison to other commodities. Secondly, in light of the prolonged weakness in grains prices, the current environment is ripe for the CORN, WEAT, and SOYB funds to deliver impressive returns in the coming years. But brace yourself for a volatile ride.
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Disclosure: No positions at time of writing.