ETF Securities to close agribusiness ETF despite compelling sector fundamentals

Aug 23rd, 2016 | By | Category: Commodities

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London-based ETF Securities will close its ETFS S-Network Global Agri Business GO UCITS ETF at the end of August, but agriculture-focused exchange-traded funds remain a compelling proposition as the global food supply/demand imbalance continues.

ETF Securities to close global agriculture ETF though sector remains compelling

ETF Securities is to close its ETFS S-Network Global Agri Business GO UCITS ETF (LSE: AGRI) at the end of August.

The fund launched in 2008 but insufficient investor demand – current AUM is £12.4m – has led ETF Securities to decide its relatively small size did not make it worth paying the associated operating costs.

Shareholders who have not sold their holding before 31 August will have their shares automatically redeemed for cash.

The global agriculture sector is typically defensive, holding up at times when more economically sensitive sectors like energy and industrial metals plunge as people still eat in times of crisis.

ETFs covering the space therefore typically act as good long-term diversifiers to traditional stock/bond portfolios and historically have been effective inflation hedges.

According to research from S&P Dow Jones Indices, the agriculture sector has a historical correlation of just 0.28 to other commodity sectors and 0.33 to the S&P 500 Index.

In the short term, however, opportunities are still present in agriculture from weather disruptions explains Jodi Gunzberg, Global Head of Commodities and Real Assets at S&P Dow Jones Indices.

“Agriculture is also sensitive to the weather that forces returns to spike when unfavourable conditions like droughts reduce crop yields,” she said.

For example, in 12 month periods following El Niño, agriculture has historically risen almost 25%.

“The result is that in the past ten years, agriculture has lost just 1.5% annualised, performing better than every sector in commodities except precious metals,” she added.

Returns to the sector are further driven by a growing disparity between supply and demand caused by a rapidly expanding global population as well as social displacements. In August, the UN’s Food and Agriculture Organization (FAO) warned that around 56 million people are facing serious food insecurity due to ongoing conflicts around the world, a strong reminder of the dire situation in the poorest countries, and encouraged investment into agricultural research and infrastructure.

Food insecurity contrasts starkly with rising food prices. Although wheat has suffered recently, tanking 50% in the last five years and around 18% year to date, other food prices have jumped in 2016. Rice (26%), oranges (40%), soybeans (20%) and sugar (37%) have all delivered healthy year-to-date returns.

Rising prices reflects positively in index performance. The BNP Paribas Global Agribusiness Index, which tracks 27 companies, is up over 4.5% year to date (to 23rd August 2016). The S&P Commodity Producers Agribusiness Index, which tracks 70 of the largest listed agriculture businesses globally, has delivered 9.8% over the same period, both in USD terms.

Investors looking for a replacement for the soon-to-be-closed ETF have a couple of options, with similar thematic exposures available from iShares and Invesco PowerShares.

The iShares fund, the iShares Agribusiness UCITS ETF (LSE: SPAG), is the biggest of the LSE-listed agriculture-related ETFs and is linked to the aforementioned S&P Commodity Producers Agribusiness Index. It has a TER of 0.55% and assets of $56m, making it much more viable from a commercial perspective. Major holdings include Monsanto, a US-based agricultural giant that may be about to merge with German behemoth Bayer, Syngenta, Deere & Co, Archer Daniels Midland and Tyson Foods.

The PowerShares offering, the PowerShares Global Agriculture UCITS ETF (LSE: PSGA), is smaller, with AUM of just $6m, but is also worth looking at. It is referenced to the NASDAQ OMX Global Agriculture Net Total Return Index, which tracks the largest and most liquid companies listed globally engaged in agriculture and farming-related activities. It is up 4.7% YTD. The fund is slightly more concentrated with 43 holdings, including Potash Corp of Saskatchewan, Archer Daniels Midland, Agrium, Monsanto and Bunge, and has a TER of 0.75%.

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