Yesterday I mentioned that the Teucrium Corn Fund (CORN) was now trading but I was not exactly right about the combo of futures that it will use to try to mitigate contango issues.IndexUniverse sets it straight; will track a daily weighted average of closing settlement prices for the second-to-expire CBOT futures contract, weighted at 35 percent; the third-to-expire contract, weighted at 30 percent; and the final 35 percent based on the contract expiring in the December following the expiration of the third-to-expire contract.
I would also note that the fund will charge a 1.71% fee which does not sound cheap. I looked at the futures chain yesterday and there is a fair bit of contango looking ahead on the curve. Obviously there is no way to know whether the contango busting strategy will work although I'm sure they have reason to think it will help.
The chart above compares the corn futures contract to the S&P 500. On the chart, and if you long at a longer time period on BigCharts, you see a fair bit of negative correlation. The correlation is not always negative but it is negative quite frequently but not in the second half of 2008.
I don't know enough about corn to know why it might have a negative correlation so often other than just simply saying it is a commodity but it is interesting. And now that stock market investors have easier access than they've had before maybe some of the effect will go away. I've never thought about corn as a portfolio diverisifier and I seriously doubt I will be buying the fund but it is something to learn more about. Maybe corn will be the holy grail of diversification and if it is then maybe buying some after the fund proves itself will make sense.
7 comments:
Interesting to note (not coming from a humanitarian angle BTW):
All grain ETFs and Futures contracts surged upwards late 2007 and first part of 2008, until the bottom fell out, of course.
From memory, the peak coincided with multiple headlines of limited foodstuff shortages worldwide and fast rising prices of basics (like milk, bread, corn products) in several states. There were also food riots in some developing countries, the very same day prices started to fall.
Over this time there were *scares* of grain shortages soon approaching which never materialized. These were among many other *scares* of peak oil, failing banks, the end of capitalism, the Loch Ness Monster running for Prime Minister etc etc so were lost in the general panic.
Every arcane investment (if you can call it that. Speculation is more like it) that comes up over the horizon is not necessarily something to learn more about.
Investors, even full-time ones, have limited time to analyze and track potential investments, not to mention staying actively on top of their existing investments. (After all, buy-and-hold is dead, don'tcha know.)
No, I'm not anti-learning, anti-different, when it comes to investing. However, most investors would be well-advised to pick their targets carefully, with an emphasis on spending time with the key investments and investment-decisions that make or break portfolios.
Stop at too many sideshows and you'll never enjoy the main circus.
BillM
1,71% fees? For a bunch of futures where you don't even get the leverage?
Count me out.
Corn is being driven by ethanol. Ethanol is driven by legislation subsidies for fuel. When the supports run out, corn will regress to the mean. Corn is not gold or oil.
Roger:
What is the advantage of a narrow ETF like corn over a stock like Vale or POT which has growth and dividend as well as Ag commodity exposure?
Sam
you might get a few different answers to that question. I would say one difference would be that a stock would often have a tighter correlation to a broad index like the SPX.
additionally a commodity is not really at risk of a management misstep.
Thanks. think BP....
Sam
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