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ETFs Can Capture Some — But Not All — Grain Market Gains

By    |   Wednesday, 04 July 2012 05:29 PM

Exchange traded funds (ETFs) allow individual traders to participate in almost any market. But that doesn’t mean ETFs deliver exactly the same gains as the market they are based on. Corn offers an example of how an ETF could disappoint investors although it might be the only way to participate in the market.

A heat wave combined with little rain in the corn fields of the Midwest have threatened the crop and unleashed a bull market in corn. In June, the price of corn futures rose more than 32 percent from May’s close. Experts are predicting more gains to come and investors are looking at how they can profit.

Traders using the Teucrium Corn Fund (NYSE: CORN) would have seen gains of only 16 percent in June. This ETF has high annual fees, which is a factor that contributes to consistent underperformance.

More diversified grain funds fared even worse than corn. ELEMENTS Rogers International Commodity ETN (RJA) is a fund that uses an index developed by renowned investor Jim Rogers. RJA delivered an 8.5 percent gain in June.

ETFs seem like they expand the investment options for individual investors, and they do. But they do not always match the expectations of individual investors. These funds can deliver returns that are significantly different than those seen in the underlying market. This is often caused by the design of the fund.

In the case of CORN, it uses different futures than the most widely followed one and will usually have lower returns. Expenses and other factors add to the underperformance.

These funds can be used for trading by individuals but they should not be considered as long-term investments in the underlying markets, and investors need to remember they are likely to see only part of the gains.

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Wednesday, 04 July 2012 05:29 PM
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