ETF Talk: Agriculture Fund Provides a Positive Outlook for Investors

Doug Fabian

Doug Fabian is known for his expert knowledge of ETFs, bear funds and enhanced index funds to profit in any market climate.

The agricultural sector in the United States has been experiencing a recent bout of hardships, particularly with the widely traded corn crop. Droughts in the Midwest have been decreasing production, reducing exports and increasing prices. While commodity markets often are volatile, they also can provide investors with gains amid rising-price environments. With agricultural commodity prices forecasted to rise, investors may find the PowerShares DB Agriculture Fund (DBA) an appetizing opportunity.

DBA spent much of the year on a downward slide before rallying sharply during the last month. After starting the year at $29.12, the fund slipped to close at a low of $25.80 on June 1. However, the fund subsequently advanced and closed at $30.32 on July 20. Now trading well above its 50-day moving average, the fund is at $29.75 as of this writing. It is my expectation that the fund will continue to improve, given the prospects for further drought-related upward pricing pressures.

The PowerShares DB Agriculture Fund (DBA) seeks to track changes in the DBIQ Diversified Agriculture Index Excess Return Index, a rules-based index that tends to reflect the performance of the agriculture sector. The fund invests in liquid agricultural commodity futures contracts in some of the most widely traded agricultural commodities, such as sugar, cattle, corn, cocoa and coffee. Diversified among several different commodities, DBA attempts to minimize potential losses and allows investors the opportunity to avoid the complexity of trading individual futures, and directly hedge price fluctuations. Still, the fund does expose investors to price fluctuations of the underlying commodities, so there is some risk.

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As of July 24, the index’s top five commodities futures were soybeans (16.62%), corn (16.42%), live cattle (11.85%), sugar #11 (11.19%), and cocoa (9.32%). All contracts are to expire between 2012 and 2013. DBA provides earnings potential to investors’ equity- and debt-heavy portfolios. In addition, DBA lets investors mitigate and potentially offset losses in U.S. and global equity markets.

If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my ETF Trader service. As always, I am happy to answer your questions about ETFs, so do not hesitate to email me by clicking here. You may see your question answered in a future ETF Talk.

 

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