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Agricultural ETFs: What You Need to Know
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# Agricultural ETFs: What You Need to Know

By

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Updated March 07, 2024

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Vikki Velasquez is a researcher and writer who has managed, coordinated, and directed various community and nonprofit organizations. She has conducted in-depth research on social and economic issues and has also revised and edited educational materials for the Greater Richmond area.

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Definition

An agricultural exchange-traded fund (ETF) invests predominantly in commodities or the stocks of companies involved in the agriculture sector. These ETFs provide exposure to crops, livestock, and equipment or services for farming and food production.

## What Are Agricultural ETFs?

Agricultural exchange-traded funds (ETFs) offer a convenient way to gain exposure to the agricultural sector. These funds track the performance of agricultural commodities, companies, and indexes.

Unlike buying individual commodities or stocks, investing in an agricultural ETF gives you a diversified portfolio in this sector with shares that trade like stocks. These ETFs can provide a basket of different agricultural assets, from corn and wheat to companies specializing in farm equipment.

### Key Takeaways

- Agricultural exchange-traded funds (ETFs) expose investors to the agricultural sector and its potential for long-term growth.
- There are two types of agricultural ETFs: those for agribusiness stocks and those for sector-specific commodities.
- When investing in agricultural ETFs, you’ll need to review their expense ratios, liquidity, underlying assets, and performance history.
- Top agricultural ETFs include the Invesco DB Agriculture Fund (DBA), VanEck Vectors Agribusiness ETF (MOO), and iShares MSCI Global Agriculture Producers ETF (VEGI).

## Understanding Agricultural ETFs

Agricultural ETFs work by pooling investor capital to buy a range of assets related to farming and agriculture. These ETFs then track the price movements of those assets.

When you invest in an agricultural ETF, you’re essentially buying shares in this portfolio. The value of your shares goes up or down with the fund’s performance. The fund is managed by authorized participants, who are there to ensure the ETF’s price reflects the value of its underlying assets.

There are two main types of agricultural ETFs:

1. Those that invest in the stocks of agribusiness companies listed on stock exchanges, known as agribusiness ETFs.
2. Those that invest in one or more agricultural commodities (either directly or indirectly using derivatives contracts).

## Agribusiness ETFs

The first type of agricultural ETF focuses on investing in the stocks of agribusiness companies. These companies are involved in all or part of the agriculture supply chain, including production, processing, distribution, and retail.

Investing in these ETFs exposes investors to seed and fertilizer manufacturers, farm machinery producers, food-processing companies, and large-scale farming operations. Agribusiness ETFs offer a way to invest in the business side of agriculture, leveraging the potential growth of these companies.

These ETFs typically track an index comprising agribusiness stocks. Investors benefit from the diversification that these ETFs offer since they are not tied to the performance of a single company but the collective performance of several.

However, it’s important to note that investing in agribusiness stock ETFs also means exposure to risks typical in the stock market, including market volatility and company-specific risks. These ETFs generally suit investors who are interested in the agricultural sector’s growth potential but prefer publicly traded companies’ stability and established nature.

Agribusiness ETFs ComparedSymbolETF NameMandateExpense RatioTotal Assets ($Million)Average Volume (30 days)Dividend YieldMOOVanEck Agribusiness ETFSelects pure-play agribusiness stocks whose revenues are more than 50% derived from agri-chemicals, animal health and fertilizers, seeds and traits, farm/irrigation equipment and machinery, aquaculture and fishing, livestock, cultivation, plantations, and trading of agricultural products0.53%$82481.4k3.15%VEGIiShares MSCI Agriculture Producers ETFIncludes stocks of companies in both the developed and emerging markets involved in the production of fertilizers, agricultural chemicals and products, farm machinery, and parts, or in packaged food and meats0.39%$14940.4k2.70%FTAGFirst Trust Indxx Global Agriculture ETFConsists of the following sub-industries: chemicals and fertilizers, seed manufacturers, irrigation equipment providers, and farm machinery companies. The portfolio also includes farmland companies, a unique feature in global agriculture.0.70%$9.43.0k3.95%IVEGiShares Emergent Food and AgTech Multisector ETFTracks an index of companies that are expected to benefit from the integration of new agricultural technologies or food products or services0.47%$4.71.7k2.18%KROPGlobal X AgTech & Food Innovation ETFPassively invests in global companies working on advancing technologies in the agricultural and food industry spaces0.50%$4.44.8k1.42%Source: TradingView (figures as of Feb. 1, 2024)

### Risks and Benefits of Agribusiness ETFs

The primary advantage of these ETFs lies in their diversification within the stock market, tapping into the growth potential of agribusiness companies driven by global food demand and technological advances. Investors can expect more stability than direct commodity investments, as these ETFs are tied to the performance of established companies.

However, they are not without risks, including market volatility and sector- and company-specific issues. These ETFs are best suited for investors seeking exposure to the agricultural sector through a traditional stock market approach, combining the potential for growth with the stability of established companies.

### Agribusiness ETFs Pros & Cons

Pros

- Allow profiting from production, distribution, and processing

- Diversification within the sector

- Professionally managed portfolios

Cons

- Limited direct commodity exposure

- Exposed to input cost inflation, food safety issues, and changing consumer preferences

## Agricultural Commodity ETFs

The second type of agricultural ETF invests in agricultural commodities. These ETFs offer exposure to physical commodities like corn, soybeans, wheat, and cattle. Some invest directly in these commodities, but most use derivatives contracts such as futures and options to gain exposure. This approach allows investors to invest in the price moves of these commodities without the need to hold the physical goods.

Commodity-based agricultural ETFs are an excellent tool for investors looking to hedge against inflation or diversify their portfolios beyond traditional stocks and bonds. Since the performance of commodities is often not correlated to stock markets, they can provide a cushion during market downturns.

However, these ETFs also come with their own risks. Commodity prices can be extremely volatile, influenced by weather conditions, geopolitical tensions, and changes in supply and demand. Additionally, investors need to be aware of the complexities of derivatives trading, such as the potential for contango and backwardation in the fund’s performance.

Agricultural Commodity ETFs ComparedSymbolETF NameMandateExpense RatioTotal Assets ($Million)Average Volume (30 days)DBAInvesco DB Agriculture FundTracks an index of 10 agricultural commodity futures. This index includes corn, soybeans, wheat, Kansas City wheat, sugar, cocoa, coffee, cotton, live cattle, feeder cattle, and lean hogs.0.93%$698535kWEATTeucrium Wheat FundTracks an index of wheat futures contracts, excluding front-month contracts2.80%$175553kCORNTeucrium Corn FundTracks an index of corn futures contracts, excluding front-month contracts2.71%$7252kSOYBTeucrium Soybean FundTracks an index of soybean futures contracts, excluding front-month contracts2.73%$2819kCANETeucrium Sugar FundTracks an index of sugarcane futures contracts, excluding front-month contracts2.80%$1845kTAGSTeucrium Agricultural FundA fund of funds that invests directly in the four Teucrium commodity funds. The fund rebalances daily to provide equal exposure to corn, wheat, sugar, and soybeans.0.13%$17.62.6kOAIATeucrium AiLA Long-Short Agriculture Strategy ETFActively traded fund that provides broad long/short exposure to one to nine commodity futures contracts1.63%$5.51.7kTILLTeucrium Agricultural Strategy No K-1 ETFActively managed portfolio that holds four agricultural commodities futures contracts: corn, wheat, soybeans, and sugar. The contract selection is at the fund advisor’s discretion.1.03%$2.81.27kSource: TradingView (figures as of Feb. 1, 2024)

### Risks and Benefits of Agricultural Commodity ETFs

Agricultural commodity ETFs offer more direct exposure to the commodities markets, specifically targeting agricultural products like grains, livestock, and related products. Their main benefit is providing a hedge against inflation and a diversification option that’s not typically correlated with the performance of the stock market. These ETFs can be attractive for their potential for high returns, especially during times of commodity scarcity or increased demand.

However, they come with inherent risks, such as high volatility because of weather conditions and geopolitical events. Additionally, the use of derivatives in these ETFs adds a layer of complexity and risk, including the effects of contango and backwardation.

Agricultural commodity ETFs are suitable for investors looking for direct exposure to the commodities market and willing to navigate the higher volatility for potentially greater returns.

### Agricultural Commodity ETFs Pros & Cons

Pros

- More direct tracking of specific commodity prices

- Easier than trading directly in the commodities or derivatives markets directly

- Could be a more effective inflation hedge

Cons

- Use derivatives, which can be complex and carry additional risks like contango and backwardation

- Face more direct risks from bad weather, natural disasters, and sudden shifts in the supply and demand balance for the specific commodity

## Things to Consider When Investing in Agriculture ETFs

Here are some key factors to consider when evaluating agricultural ETFs:

- Commodity exposure: Some agriculture ETFs focus on farming equipment, fertilizer producers, distributors, etc. Others directly or indirectly hold agricultural commodities. The latter tend to have more volatility.
- Global diversification: Look for ETFs exposed to agriculture across geographies, including emerging markets with strong population growth. This mitigates weather effects or natural disasters that can impact production or distribution.
- Supply chain positioning: ETFs focused on upstream producers face more weather risks vs. downstream processors and distributors with more diversified input sources.
- Dividend potential: Some agribusiness companies offer attractive dividends that contribute to total returns. Commodities-based ETFs, however, do not pay dividends.
- Environmental, social, and governance (ESG) criteria: Sustainable farming practices and other ESG criteria are increasingly important to many investors.
- Costs: Compare expense ratios between ETFs with similar exposures. All else equal, funds with higher expense ratios will eat more into net returns.
- Liquidity: Check that an ETF has enough assets under management, reasonable bid-ask spreads, and daily trading volumes for easy purchases and sales.
- Index methods: Evaluate how the ETF’s underlying index is weighted among subsectors, market caps, geographies, etc.

Incorporating these factors into due diligence will help identify well-structured agricultural ETFs suited to an investor’s specific objectives and risk tolerance. Periodic rebalancing is also recommended to maintain target allocations over time.

### Tax Considerations

Some commodity exchange-traded products are structured as limited partnerships (LPs). Investors in these ETFs might receive a Schedule K-1 for tax purposes, which can complicate tax filings as LPs pass through their income, gains, losses, and deductions to their investors.

Investments in certain types of commodity ETFs could also generate “unrelated business taxable income,” which can be an issue for tax-exempt investors like individual retirement account (IRA) holders.

Commodity ETFs that hold futures may generate income subject to the blended 60/40 tax rates applied to Section 1256 contracts. This blend aims to balance short- and long-term rates.

Investing in commodities is complicated, and tax rules and laws are constantly changing. Always consult with your tax professional for any questions about the taxation of ETFs.

## Investing in Agricultural ETFs vs. Individual Agricultural Stocks vs. Agribusiness ETFs

This table offers a snapshot comparison of investing in individual agricultural stocks compared with agriculture commodity ETFs and agribusiness ETFs. When considering such an investment, it’s important to review each option in terms of your financial goals, risk tolerance, and market conditions.

Aspect****Individual Agricultural Stocks****Agribusiness ETFs****Agricultural Commodity ETFs****Investment FocusSpecific agricultural companiesRange of companies in the agribusiness sectorAgricultural commodities directly or via derivativesDiversificationLow, focused on individual companiesHigher, across various companies in the sectorModerate, across different commoditiesMarket ExposureDirect exposure to company performanceExposure to the broader agribusiness sectorExposure to commodity market dynamicsVolatilityHigher, subject to company-specific risksModerate, diversified across multiple stocksHigh, subject to commodity market fluctuationsPotential for GrowthDepends on individual company growthDepends on overall sector growthDepends on commodity market trendsComplexityModerate, requires research on individual companiesLower, due to managed portfolioHigher, especially if ETF is using derivativesSuitabilityFor investors with specific knowledge or interest in a companyFor those seeking broad exposure to agribusinessFor those looking to invest directly in commoditiesRisk ManagementRequires active management and researchGenerally lower risk due to diversification within the sectorRequires understanding of commodities and derivativesIncome PotentialDividends from individual companiesDividends based on the fund’s holdingsTypically does not focus on income generationLiquidityVaries based on the market involvedGenerally high, as ETFs are traded like stocksGenerally moderate to high, but can vary based on the ETF

## Is There an ETF that Invests in Farmland?

While there’s no specific ETF for investing exclusively in farmland, the First Trust Indxx Global Agriculture ETF (FTAG) comprises farmland companies and firms involved in chemicals and fertilizers, seeds, irrigation equipment, and farm machinery. Other agribusiness or agricultural commodity ETFs like MOO or DBA can give indirect exposure to farmland through the crops they produce or the equipment that farms them. This is mainly because ETFs are structured to hold securities like stocks and bonds rather than direct land holdings.

That said, at least two real estate investment trusts (REITs) hold primarily farmland. Like ETFs, REITs trade like shares on stock exchanges but own and manage real property on behalf of shareholders:

- Gladstone Land Corp. ( LAND): With farmland and farm facilities across the United States, primarily targeting fruit and vegetable cropland
- Farmland Partners Inc. ( FPI): Purchases, leases, and manages farmland throughout North America, comprising more than 178,000 acres

## Are Agriculture ETFs a Good Long-Term Investment?

Whether agriculture ETFs have been a good investment in the past often depends on the specific time frame and the type of ETF. Historically, agriculture as a sector has shown mixed results.

Their performance is closely tied to the agricultural commodities market, which can be highly volatile. Weather patterns, geopolitical events, global supply-demand dynamics, and economic trends significantly influence this sector. For instance, periods of commodity scarcity or booming global demand can lead to impressive returns, while oversupply or reduced demand can lead to underperformance.

Still, as the world population increases, so does the demand for food and related businesses. This fundamental need can drive long-term growth in the agriculture sector. Innovation in agricultural practices and sustainability measures can also boost productivity and efficiency in the industry, potentially benefiting agribusiness companies’ profitability.

## Is Agriculture a Good Inflation Hedge?

Agriculture is often considered a good hedge against inflation, primarily because it involves tangible assets whose value can rise with increasing prices. The essential nature of agricultural products further ensures steady demand, which tends to remain resilient or even grow during inflationary periods, potentially leading to higher commodity prices.

Additionally, supply constraints in agriculture, such as limited land and water resources, can further elevate prices when demand outstrips supply, especially during inflation.

Research shows that agricultural products historically have had the highest correlation with inflation compared with energy and industrial commodities, with grain commodities like barley, oats, and wheat exhibiting especially high inflation hedging capacity over the centuries.

However, since the second half of the 20th century, the correlation between agricultural commodities and inflation fell from the 0.6 range to just around 0.2, while energy commodities became a more effective hedge. The declining hedging capacity of agricultural commodities over time was attributed to the rising importance of industrial and energy commodities and greater diversity in consumption baskets determining inflation.

## The Bottom Line

Investing in agricultural ETFs offers a balanced mix of risk and potential reward. It allows investors to tap into the vital agricultural sector’s growth while providing diversification to stabilize their portfolio.

Agribusiness ETFs invest in diversified portfolios of stocks related to the agriculture and farming industries, while commodities ETFs invest in one or more agricultural products like corn or wheat using derivatives contracts. Understanding the nuances, from expense ratios to global market influences, is key to making informed investment decisions in this field.

The comments, opinions, and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or adopt any investment strategy. While we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described in our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions, and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment, or strategy.

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