Assets Under Management AUM

DBA ETF: good returns, not for hedging or wealth creation

AleksandarGeorgiev

~ by Snehasish Chaudhuri, MBA (Finance)

In a market where most stocks are losing value, Invesco DB Agriculture Fund (NYSEARC: DBA) is one of the exceptions. The price of this exchange-traded fund (“ETF”) increased by 11 percent over the past year and 5 percent in 2022. Since hitting an all-time high during the COVID-19 pandemic in June 2020, the price has risen by 75 percent in the following years, then it went down a bit. The stock is currently trading at $20.66, or nearly equal at its net asset value (“NAV”). Currently, the fund has $1.53 billion in assets under management (“AUM”) and has an expense ratio of 0.86%.

DBA offers investors a convenient and profitable way to invest in commodity futures. But, due to the volatile nature of futures contracts, changes in the market prices of the underlying securities could result in significant losses. Additionally, the fund pays no dividends and investors must rely solely on the growth of its market price, which will again be determined by the growth of its net asset value. This fund is not suitable for all types of investors due to its speculative nature, particularly when markets are volatile.

Invesco DB agricultural fund is better than commodity-linked notes

Invesco DB Agriculture Fund invests in a combination of commodity futures as well as US Treasury securities, money market funds and Treasury bill ETFs. For the commodity futures portion, it seeks to track changes, positive or negative, in the level of the DBIQ Diversified Agriculture Index Excess Return. Thus, this index reflects the performance of the entire agricultural sector. Investors cannot invest directly in the Index. The Invesco DB Agriculture Fund and Index are rebalanced and reconstituted annually in November.

This agricultural index is a rules-based index comprised of the most traded and liquid agricultural commodity futures. Nearly half of Invesco DB Agriculture Fund’s investments are made in corn (6.87%), soybean (6.86%), coffee (6.06%), cattle futures foot (5.67%), sugar (5.44%), cocoa (4.66%). , lean hogs (4.36 percent), hard red winter wheat (3.45 percent), soft red winter wheat (3.27 percent), feeder cattle (1.85 percent) and cotton (1.31 percent).

Invesco DB Agriculture Fund invests in liquid futures contracts that trade on formal exchanges and therefore has certain advantages over investing in physical commodities or conventional commodity indices. The Fund does not incur any storage costs for any physical commodity. Nor does he have to bear the cost of entering into a commodity-linked note with a broker, a cost which is usually much higher than entering into an exchange-traded futures contract. All of these allow the fund to operate at a lower cost, which is reflected in its expense ratio.

In order to diversify the risk of investing in commodity futures, this fund invests in US Treasury securities, money market funds and Treasury bill ETFs. These investments are very well rated (AAA or AA) and present an almost zero risk of default. This also allows the fund to earn interest on these securities and contributes to its overall return. Invesco DB Agriculture Fund invests in liquid futures contracts at publicly available prices on regulated futures markets. Thus, investors gain more direct and profitable exposure to agricultural commodities than by buying commodity-linked bonds, which are less liquid and not traded on exchanges.

Invesco DB Agriculture Fund seems to be a risky fund

As a hedge fund, Invesco DB Agriculture Fund carries a high degree of risk. Investors can lose a substantial amount of money due to the extreme volatility of futures contracts. Thus, this fund is not a good option for building cumulative wealth. Instead, the DBA can be thought of as a basket of diversified agricultural commodity futures. However, diversification between different agricultural products is not the same as diversification between industries, as it always suffers from unsystematic risk. Unsystematic risk is a type of investment risk that is endemic to an individual asset or a group of asset classes, such as commodities or guaranteed mortgage bonds.

Some investors may think that the expected food shortage due to Russia’s invasion of Ukraine may be useful for this index, as people will buy more and more agricultural products in the future in order to guarantee the supply. eating. However, this logic has some limitations. Unlike purchases of energy and metals, most governments in this world do not try to secure agricultural commodities by trading in futures contracts. Second, most of the commodities in which DBA has invested have little ties to Russia or Ukraine. For example, the production and supply of coffee, live cattle, sugar, cocoa, fattening cattle and cotton will hardly be affected by this reckless war.

Conclusion

Theoretically, Invesco DB Agriculture Fund should be useful to cover food inflation. Investors also gain more direct and profitable exposure to agricultural commodities than by buying physical commodities or commodity-linked bonds. But those are not the goals of commodity ETF investors. Investors intend to create wealth by investing in ETFs, either through dividend income or through price gains. Unfortunately, this fund does not pay dividends. On the other hand, the gains are not excessively high, or too speculative, to be able to repay the high level of risk taken by investors.

The 75% growth over a 3-year period after this fund hit an all-time low due to the COVID-19 pandemic was primarily the result of growth on an extremely low base. This may have been reinforced by speculation about food shortages following the Russian invasion of Ukraine. In fact, the fund has experienced both very short-term (8% over the past 6 months) and long-term (30% over the past 10 years) losses. DBA’s investment in completely unrelated products also doesn’t help much, as it doesn’t address the fundamental limitations of this fund. The volatile nature of agricultural commodity futures generates enough skepticism for investors looking for steady wealth creation.