ETFs For A Global Food Catastrophe

A global food crisis may be coming, but some ETFs can help successfully navigate the potential fallout.

Russia’s invasion of Ukraine has rattled the world in more ways than one with troubling issues of violence and human rights abuses.

But from a global perspective, Russia and Ukraine are also key sources of agricultural products, and the disruption is having major consequences in terms of food supply and inflation.

Consider that, together, Ukraine and Russia account for 12% of traded calories, including 28% of wheat, 29% of barley, 15% of corn and 75% of sunflower oil, according to an article in The Economist. The disruption to the global food supply is also likely driving inflation.

The Economist article also notes that increased food costs have driven food insecurity up, from affecting 440 million people to affecting 1.6 billion, and it says 250 million are literally on the brink of famine. That suggests food inflation isn’t going anywhere. Hedging away at least part of the threat that food inflation represents to an investor’s personal wealth could be a matter of finding the right ETF.

Equity ETFs To Consider

The simplest way is to find a long-only equity strategy, and there are a few choices in this area, the largest being the $2 billion VanEck Agribusiness ETF (MOO). There’s also the $297 million iShares MSCI Global Agriculture Producers ETF (VEGI) and the $293 million Invesco Dynamic Food & Beverage ETF (PBJ).

MOO comes with an expense ratio of 0.56%, while VEGI charges 0.39%. PBJ is the most expensive, at 0.63%. MOO’s daily average dollar volume at $39.5 million is roughly five times that of VEGI’s. The former is older and more established, having launched in mid-2007, while VEGI rolled out in early 2012. PBJ is the oldest fund, having launched in mid-2005; its average daily dollar volume is $9.28 million.

But MOO has just 56 holdings versus VEGI’s 143. Both have weightings to the U.S. that are close to 60% (58.75% for VEGI and 60.39% for MOO). Canada and Norway claim the Nos. 2 and 3 spots, respectively, for VEGI at 9.39% and 5.42%. Meanwhile, MOO weights Germany at 9.61% and Canada at 6.43%. Whereas Norway has a 5.31% weighting in MOO and is its fourth-largest country, VEGI doesn’t even include Germany in its top 10 countries. PBJ is an exclusively U.S. fund, with just 31 holdings.

Digging into the underlying sectors for these funds shows that process industries is the largest sector, based on the Thomson Reuters classification system, for both MOO and VEGI, with the former weighting the sector at 47% and the latter weighting it at 61%. Process Industries has a weight of 11% in PBJ and is its third-largest sector.

Top Sectors	MOO	VEGI	PBJ
1	Process Industries, 47.14%	Process Industries, 60.87%	Consumer Non-Durables, 65.56%
2	Health Technology, 19.99%	Producer Manufacturing, 27.19%	Retail Trade, 14.23%
3	Producer Manufacturing, 16.60%	Consumer Non-Durables, 9.70%	Process Industries, 11.15%

MOO and VEGI have 33 holdings in common but have only five to six in common with PBJ. Among the top 10 holdings of both MOO and VEGI are Deer & Co., Nutrien Ltd., Archer-Daniels-Midland Co., Corteva Inc. and Mosaic Co. Of those, PBJ only includes Archer-Daniels-Midland in its top 10 holdings.

If you look at the factor exposures of the three equity funds, there’s a certain amount of similarity among the leading factors. The top three factor exposures for MOO are momentum at 0.69, low size at 0.22 and low volatility at 0.14. For VEGI, the top three exposures are momentum at 0.88, low size at 0.33 and value at 0.13. PBJ’s top three factor exposures are low size at 0.94, low volatility at 0.89 and momentum at 0.57.

Ultimately, MOO and VEGI represent the production end of the food chain, while PBJ’s holdings more strongly resemble a list of products you’d find in a U.S grocery store.

The global nature of the potential food crisis seems to call for a globally oriented investment product, but PBJ’s domestic focus may also be a way to more directly hedge the impact of inflation on a U.S. investor’s personal consumption. Food inflation in the U.S. was at 9.4%, while the overall CPI was at 8.3%. Both numbers are highs not seen since the early 1980s.

A Commodity ETF Possibility

If you want to get to the roots of what’s going on with rising food prices though, the commodity market may be the way to go. However, commodity futures tend to be volatile, with roll costs and additional tax implications.

The commodity market in general has been on fire, as Russia in particular is a source of many nonagricultural commodities. With the country now excluded from a wide range of markets at the global level, commodities have gotten a major boost. But the biggest bump could ultimately come from agriculture.

The $2.4 billion Invesco DB Agriculture Fund (DBA) comes with an expense ratio of 0.93%, making it significantly more expensive than the equity funds mentioned in this article. Its average daily dollar volume is also significantly higher than that of MOO, at more than $64 million.

There are a number of futures-based agricultural commodity products available, but with 10 separate futures contracts covered, DBA takes the most comprehensive view of the space. Its list of futures contracts includes corn, soybeans, wheat, Kansas City wheat, sugar, cocoa, coffee, cotton, live cattle, feeder cattle and lean hogs.

Performance

Among these four funds, the performance has been somewhat scattered; however, all four have seen significant year-to-date inflows.

DBA has pulled in $1.2 billion in less than five months, while MOO has pulled in $791.8 million and VEGI gained $218.8 million. PBJ took in $195.2 million.

And it’s really DBA that has had the best performance, with a gain of 13.26% year to date and a gain of 22.35% over the past 12 months. VEGI was trailing behind, with a YTD return of 8.77% and a 12-month return of 9.88% during two periods when the broader global equity market was sharply down.

PBJ’s focus on solely the U.S. and MOO’s smaller component list may have put dampers on performance, while VEGI has benefited from its broader range of holdings that still overlaps quite a bit with MOO’s component list (holdings in common with MOO represent almost a quarter of VEGI’s portfolio). PBJ is down nearly 2% year to date and is up less than 5% over the one-year period, while MOO has returned 0.92% and 5.27% for those periods, respectively.

Final Thoughts

VEGI seems like a strong choice for an investor who wants to alleviate the impact of the potential coming global food scarcity issues on their own portfolio or lifestyle.

While DBA is a clear winner in terms of recent performance and focuses on the raw materials of food products, it is still a commodity futures fund, with all the issues that come with that type of product. MOO is certainly the stalwart in the space, but its recent performance, narrower portfolio and higher expense ratio make it a close second to VEGI.

PBJ would be great if you wanted specific exposure to U.S. food and beverage consumption, but given this is a global trend, it seems like it is best captured by a product that focuses on the early stages of the food supply chain at the global level.

Contact Heather Bell at [email protected]