Through Hilary SmithInternational banker
AAs the world continues to grapple with the looming specter of rising inflation this year, countries around the world are scrambling to contain runaway prices while preventing their economies from sliding into deep recession. Few sectors have experienced more price increases – and contributed far more to global inflationary frenzy – than food. Whether it’s agricultural commodities, food and beverage products, or even ancillary industries such as food processing equipment, it has undoubtedly been a year for investors to increase their exposure to the food sector.
The most direct way to get exposure to the food sector is to invest directly in agricultural commodities. This can be done by identifying a specific commodity and investing in futures contracts on that commodity. Or, as is more common these days, you can invest in a fund that has exposure to a broader range of agricultural products. That Items associated with the Rogers International Commodity Index-Agriculture Total Return (RJA)., for example, is an Exchange Traded Note (ETN) tracking the performance of the Rogers International Commodity Index—Agriculture Total Return, a well-known index that represents the weighted value of a basket of 20 of the most liquid agricultural commodity futures contracts. It is also a sub-index of the broader Rogers International Commodity Index.
The fund launched in 2007 and had nearly $190 million in assets under management (AUM) at the end of July, placing it on the smaller end. Nonetheless, this ETN has performed solidly year-to-date, posting more than 8 percent gains while its 1-year, 3-year, and 5-year returns are up 20.2 percent, 77.9 percent, and 52.8 percent, respectively are spectacular. The largest components of the fund are wheat (20.06 percent), corn (13.61 percent), cotton 11.60 percent, soybeans (8.60 percent) and coffee (5.73 percent).
But there’s no denying that the commodities asset class is often very volatile – which is rarely shown more clearly than in 2022, it must be added – meaning that startling lows can quickly follow staggering highs. Therefore, investors looking for more stable performance can also invest in exchange-traded funds (ETFs) that focus on food and beverage companies, whose performance tends not to be as volatile as the underlying soft commodities.
That Invesco Dynamic Food & Beverage ETF (PBJ) is one of those funds — in fact, it’s the oldest dedicated grocery ETF. It invests at least 90 percent of its total assets in the Dynamic Food & Beverage Intellidex Index, which includes stocks from 30 US food and beverage companies. These companies are mainly engaged in the manufacture, sale or distribution of food and beverages, agricultural products and products related to the development of new food technologies. The fund and index are rebalanced and recomposed quarterly in February, May, August and November.
PBJ thus offers investors a lower-risk equity investment than soft commodities, as demonstrated by the fund’s performance over the years. Year-to-date performance is 1.7 percent, while 1-year (11.2 percent), 3-year (11.3 percent), 5-year (8.3 percent) and 10-year ( 10.1 percent) are more than respectable. Its holdings represent a fairly balanced mix of small-cap, mid-cap, and large-cap companies, and a broadly even split between growth, mixed-media, and value stocks. Fund allocations are also relatively more evenly balanced among holdings than other food ETFs, with General Mills (5.5 percent), Keurig Dr. Pepper (5.4 percent), Sysco Corp (5.3 percent), Hershey Co (5.2 percent), and PepsiCo (5.1 percent). the companies with the largest weightings.
Or, if established food companies don’t appeal to investors for one reason or another, there’s also an opportunity for them to broaden their horizons and target a complementary aspect of the gargantuan food ecosystem. For example, one might be more interested in companies involved in agriculture, almost combining many of the desirable attributes of the two RJA and PBJ funds above – the former’s previous exposure to the upstream food industry and the stocks (rather as a commodity) returns of the latter.
The VanEck Agribusiness ETF (MOO) offers just such exposure. The fund tracks the performance of the MVIS Global Agribusiness Index, which includes companies involved in agrochemicals; animal health; Fertilizer; seeds and properties; farming and irrigation equipment and agricultural machines; aquaculture and fisheries; Cattle; Cultivation and plantations (including cereals, oil palms, sugar cane, tobacco leaves, grapevines, etc.); and trade in agricultural products.
The fund currently invests in 52 companies, more than half of which are based in the United States. Germany, Canada, Japan, Chile, Norway, China, Great Britain, Brazil and Australia make up the remaining top 10 locations. Perhaps even more surprising is the diversity of sector exposure, with materials (32.5 percent), consumer staples (30.4 percent), industrials (19.3 percent) and healthcare (17.8 percent) as the key components.
And with $1.6 billion in assets under management (of which nearly $0.5 billion has flowed in since war broke out in Ukraine in late February), MOO is among the largest food/agriculture ETFs in the space . Short-term performance was more mixed, with the month of July up 6.3 percent, while the trailing three-month and year-to-date performance was less impressive at -6.8 percent and -3.7 percent, respectively. However, longer-term yields were solid, with 1-year, 3-year, 5-year and 10-year bonds positive at 1.34 percent, 12.62 percent, 11.63 percent and 8.34 percent, respectively were.
Given the importance investors place on environmental, social and governance (ESG) issues when deciding which asset classes and investment products to fund in today’s markets, VanEck also recently launched its Sustainable Future of Food UCITS ETF (VEGI). Companies eligible for the fund must meet certain ESG standards related to food and agriculture sustainability and safety. According to VanEck, this fund “invests in companies that are breaking new ground to feed a global population of eight billion and growing,” primarily through:
- Investing in companies that are at the forefront of new forms of sustainable food transformation;
- Gaining diversified exposure to companies offering meat and dairy alternatives, organic foods, food flavors or innovative farming technologies;
- Access to companies with the potential to generate half of their revenue from the sustainable food revolution;
- Avoiding companies that violate the principles of the UN Global Compact, derive revenue from controversial weapons, or are involved in the fossil fuel, nuclear power, civilian firearms, or tobacco sectors.
The fund tracks the MVIS Global Future of Food ESG Index, which includes the largest and most liquid companies providing products and services related to meat and dairy alternatives, organic foods, food flavors and innovative agricultural technologies. These include companies with at least 50 percent of their sales from plant-based or cultured meat, protein, or dairy alternatives; vertical or urban farming; precision agriculture, including companies engaged in irrigation and smart water network equipments; greenhouse equipment; autonomous and robotic agriculture; or agricultural implements. But it excludes agricultural chemicals and plant seeds; food flavorings and functional ingredients; and organic or organic foods.
VEGI currently holds a portfolio of 35 companies, with US multinational ingredient company Ingredion receiving the largest weighting (7.7 percent), followed by Canadian dairy company Saputo (5.4 percent), Irish food company Kerry Group (5.0 percent) and US packed-bakery food company Flowers Foods (4.6 percent) and US specialty ingredients company Balchem Corp (4.6 percent).