Inside The Corn ETF (CORN)

by on June 14, 2010

In recent years, ETF assets have climbed towards $1 trillion and the number of products has surged past 1,000. Much of the growth in both products and assets has been attributable to commodity ETFs, as investors have embraced the exchange-traded structure as an efficient way to add the benefits of natural resource exposure to their portfolios. In addition to a number of broad-based products offering exposure to a basket of commodities, there are now a number of resource-specific exchange-traded commodity products.

The most popular commodity-specific funds are found in the Oil & Gas ETFdb Category, offering exposure to energy resources such as crude oil and natural gas. But there are also targeted ETFs and ETNs offering exposure to everything from copper to sugar, offering investors a unique set of tools for either betting on or hedging against changes in commodity prices. One of the more unique commodity products out there is the Teucrium Corn Fund (CORN), a recently-launched fund designed to offer investors exposure to corn prices.

Under The Hood

Exchange-traded commodity products generally fall into one of three categories, including physically-backed products (such as gold ETFs), futures-based funds, and exchange-traded notes (see Guide To Commodity ETF Investing). CORN falls into the second category; an important distinction to make since many of the products in the Agricultural Commodities ETFdb Category are structured as ETNs.

The manner in which CORN achieves exposure is somewhat unique. Most futures-based products, including the ultra-popular United States Natural Gas Fund (UNG) and United States Oil Fund (USO) invest exclusively in near-month contracts, rolling the holdings as the expiration data approaches. Others spread their holdings over a number of different months; the United States 12 Month Natural Gas Fund (UNL) invests in near month natural gas contracts and contracts for the following 11 months, while DBC’s holdings are spread across a variety of maturities.

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.

The unique exposure offered by CORN comes at a price; the management fee comes in at 1.0%, but the “all-in” expense ratio–including commissions incurred in trading futures contracts and other fees–is estimated at 1.71%, among the most expensive in the industry.

Corn ETF Price Drivers

Because CORN achieves its exposure to prices through futures contracts, it’s important to note that changes in share price depend not only on changes in spot corn prices, but also on the “roll yield” incurred or earned when expiring contracts are sold and longer-dated contracts are purchased. There are a number of factors that impact the price of corn, including:

  • Growing Conditions: Prices for corn, like most agricultural commodities, depend on growing conditions in regions of the world that account for a significant portion of supplies. Corn is the United States’ largest crop in terms of both value and volume, with Iowa, Illinois, Nebraska, and Minnesota accounting for over half of the country’s output. In total, the U.S. grew almost 40% of the world’s corn in fiscal 2009, producing more than 300 million metric tons. Other big producers include China (165 million metric tons) and Brazil (50 million tons).
  • Ethanol Demand: Corn is unique from most agricultural commodities in that industrial activities account for a significant portion of demand. Corn is a primary ingredient in ethanol, a biomass that has emerged as an alternative to gasoline and petroleum in recent years. To the extent that ethanol demand picks up, competition for corn will increase, and prices will generally rise.
  • Crude Oil Prices: Because corn has become an increasingly viable substitute for crude oil–thanks to the rise of the ethanol industry–prices can be influenced by the market level of crude oil. If oil prices remain remain at elevated levels, demand for alternative fuels increases, driving up corn prices as well.
  • Inflation: Many investors view exposure to agricultural commodities as a hedge against rising prices; when an inflationary environment sets in, food prices are often among the first to rise (see Beyond TIP: Ten ETFs To Protect Against Inflation). Conversely, when prices decline food

Alternative ETF Options

Although CORN is the only ETF to offer pure play corn exposure, there are a number of funds that include corn:

  • PowerShares DB Agriculture Fund (DBA): Corn makes up about 12.5% of this fund, which also includes soybeans, sugar, and a handful of other commodities.
  • iPath Dow Jones-UBS Grains ETN (JJG): Corn futures make up about 32% of the index to which this ETN is linked; the remainder is split between soybeans and wheat.
  • E-TRACS UBS Bloomberg CMCI Food ETN (FUD): Corn makes up almost 20% of this cleverly-named ETN; among the other 11 holdings are sugar, coffee, and cattle.

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Disclosure: No positions at time of writing.