ETF Talk: Agriculture Provides Growth Potential

Doug Fabian

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

In the wake of this summer’s devastating drought, domestic crop prices are spiking. In addition, a rare period of summer-like temperatures in March caused trees to blossom earlier than usual, only for crops to be decimated by unexpected freezing in April. These atmospheric disruptions have resulted in a significant U.S. grain shortage. In light of these conditions, the agriculture sector could provide a potentially appealing investment opportunity. In particular, I’ve got my eye on the PowerShares DB Agriculture Fund (DBA).

After beginning the year at a tepid $29.12, the fund continued to fall before bottoming out at $25.80 on June 1. Since then, the fund has risen to close at $30.19 on Sept. 11. DBA now is up 4.12%, year-to-date.

Established in 2007, the PowerShares DB Agriculture Fund (DBA) seeks to track changes, whether positive or negative, in the level of the DBIQ Diversified Agriculture Index Excess Return™, plus the interest income from the fund’s holdings of US Treasury securities, less the fund’s expenses.

As of June 30, 2012, DBA’s top index allocation is as follows: corn, 12.5%; soybeans, 12.5%; sugar, 12.5%; live cattle, 12.5%; and cocoa, 11.11%. As you can see, the fund is invested widely (but exclusively) in the agriculture sector.

As indicated, this exchange-traded fund (ETF) invests exclusively in the agriculture sector, so it does expose investors to the sector’s associated risks. However, as U.S. agriculture continues to recover from the summer’s climate, the fund could provide a significant investment opportunity. Because the fund continues to trade at a premium to its net asset value (NAV) of $28.21, I cannot necessarily recommend investing in it at this time. Nonetheless, it remains a fund to watch.

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If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please check out 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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