Commodities are getting more exposure as the market fight back against inflation. ETF assets have reached over $1 trillion and much of it has been contributed by the commodity ETFs. Investors look at these ETFs as an efficient way of adding natural resources to benefit their portfolios. Where oil & gas, sugar and gold have gained much popularity, a distinctive commodity product in the ETF market is the Teucrium Corn Fund (NYSE: CORN).
CORN is the first exchange traded product to focus exclusively on corn. CORN achieves exposure to the commodity through futures contracts traded on the Chicago Board of Trade five times a year. it was introduced with an expense ratio of 1% which was above average the agricultural commodities ETF category.
The CORN ETF achieves exposure in somewhat unique way. Most of the future contracts or products invest exclusively in near month contracts or spread holdings over a number of different months. Whereas CORN reflects the daily changes in terms of a percentage of weighted average of futures contracts.
CORN tracks daily changes for three futures contracts for corn:
- 35% weighting for the second-to-expire contract
- 30% weighting for the third-to-expire contract
- 35% weighting for the contract expiring in December
This shows that the CORN ETF will not roll its holdings every month which will reduce the impact of contango on the price of the contracts.
By the end of 2010, CORN ETF added more than 14% on the trading volume due to high demand of the commodity not only in the US but from around the world as well. However changes in corn prices is not the only driver for CORN ETF, the roll yield earned on the expiring contracts are also impacting price of corn. Corn prices also depend on the growing conditions around the world. Only in China produces have the ability to pull up 165 million metric tons of corn.
Also corn is a primary ingredient in ethanol which has its demand pick up since it emerged as an alternative to gasoline. This has mad corn viable substitute for crude oil as well. Investors view agricultural commodities as a hedge against rising prices, inflation environment also causes the prices to rise. CORN ETF has all these major factors contributing to it playing well in the ETF market.
Apart from the CORN ETF some other funds also have exposure to the commodity. PowerShares DB Agriculture Fund (DBA) has about 12.5% of the fund made up through exposure to corn, iPath Dow Jones-UBS Grains ETN has 32% and E-Tracs UBS Bloomberg CMCI Food ETN has 20% exposure to corn.
In US farmers are being expected to increase corn production which is definitely going to influence the CORN ETF. The demand is due to the increasing purchasing power along with growing population. Corn itself is a vital commodity for packaged food and livestock production. Due to its substitute usage in many other areas of industrial usage, the demand is still going to surge which will make the prices rise as fluctuation occurs between supply and demand.