A Hedge Against Your Expensive Grocery Bill

Americans are getting crushed every time they fill up at the gas station. Even their grocery bill has gotten more expensive. 

Like it or not, inflation is here, and here to stay. 

One way investors can combat the threat of inflation is by investing in commodities. One of the easiest ways to invest in commodities is through ETFs. 

The Invesco DB Agriculture Fund ETF (DBA) invests in agricultural futures. 

Financial pros searched for this ETF 75 times in the past month making it not only the top agricultural ETF search but #28 overall for ETF searches.

That’s pretty impressive given that this ETF used to trade less than one million shares per day less than six months ago.

Popularity aside, we think DBA is the best of the agricultural ETFs.

But does that mean now is the right time to harvest?

Invesco DB Agriculture Fund ETF (DBA)

Invesco’s DBA ETF seeks to track investment results of the DBIQ Diversified Agriculture Index Excess Return. The fund is designed for investors who want a cost-effective and convenient way to invest in commodity futures. 

While DBA is up substantially over the last year, it has had negative returns over the last ten years.

As of May 18th the distribution of the portfolio looked like this:

Wheat Futures 17.69% ; Corn Futures 14.83%; Soybeans Futures 13.40%; Sugar Futures 11.26%; Coffee Futures 10.25%; Live Cattle Futures 10.08%; Cocoa Futures 9.12%; Lean Hogs Futures 7.99%; Cotton Futures 3.18%; Feeder Cattle 3.17%  

The index is rules-based and composed of futures contracts on some of the most liquid and widely traded agricultural commodities. 

Futures contracts for commodities tend to exist in contangocontago. This is a condition where the contracts with expirations further out trade at higher prices than the nearer-dated ones.

When a fund like DBA goes to roll from the expiring contract to the next month, it often does so at a loss since the longer-dated contract costs more.

Over time, this erodes the value of the fund which is why these aren’t great investments over the long-haul.

The fund and the index are rebalanced and reconstituted annually in November. 

Currently, it has $2.22 billion in net assets. 

The expense ratio for DBA runs at 0.85% which is higher than many ETFs but not terrible for this kind of ETF.

Investing In DBA

DBA has become an actively traded ETF. On an average day, you can expect trading volume to exceed 2-4 million shares. 

Given the volatile and risky nature of futures trading, DBA, is not suitable for all investors. Especially those who have low to moderate risk appetites. 

Here is the risk profile of DBA over the last 5 years…

This alpha here tells us the investment loses value relative to the Bloomberg Commodity Trust.

Plus, the sharpe ratio of 0.20 says the ETF isn’t market beating over the long run.

However, the beta and standard deviation all point to lower volatility than the benchmark.

DBA tends to have an inverse relationship with the S&P 500. As of May 18, the  SPDR S&P 500 ETF (SPY) is down 18.47%. Meanwhile, DBA is up 13.83%

Our Opinion – 6/10

With inflation expected to get worse before it gets better, investing in the short-term six to twelve months, may pay off for investors. 

However, this ETF is better used as a short-term trading instrument rather than an actual investment vehicle.

Practically speaking, if an investor wants exposure to agriculture for years, they’re better off holding a basket of companies in related industries.