DBA ETF: Good Returns, Not For Hedging Nor Wealth Creation

Workers pitting cherries in a chia pudding factory


~ by Snehasish Chaudhuri, MBA (Finance)

In a market where most stocks are falling in value, Invesco DB Agriculture Fund (NYSEARCA:DBA) is one of the exceptions. The price of this commodity exchange-traded fund (“ETF”) rose 11 percent last year and 5 percent in 2022. Since hitting a record low during the COVID-19 pandemic in June 2020, the price has moved up 75 percent within the next couple of years, and then it went down a bit. The stock is currently trading near $20.66 same at its net asset value (“NAV”). The fund currently has $1.53 billion in assets under management (“AUM”) and has an expense ratio of 0.86 percent.

DBA offers investors a convenient and affordable way to invest in commodity futures. However, due to the volatility of futures contracts, changes in the market prices of the underlying securities can cause large losses. In addition, the fund does not pay a dividend and investors have to rely solely on the growth of its market price, which in turn is determined by the growth of its NAV. Due to its speculative nature, this fund is not suitable for all types of investors, especially when markets are volatile.

The Invesco DB Agriculture Fund is better than the commodity-linked notes

The Invesco DB Agriculture Fund invests in a mix of commodity futures, US Treasuries, Money Market Funds and Treasury Bill ETFs. For the commodity futures portion, it attempts to replicate changes, positive or negative, in the excess return level of the DBIQ Diversified Agriculture Index. In this way, 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 recomposed annually in November.

This agricultural index is a rules-based index composed of futures contracts on the most traded and liquid agricultural commodities. Almost half of the Invesco DB Agriculture Fund’s investments are in futures contracts on corn (6.87%), soybeans (6.86%), coffee (6.06%), livestock (5.67%), sugar (5, 44 percent), cocoa (4.66 percent). , lean hogs (4.36 percent), hard red winter wheat (3.45 percent), soft red winter wheat (3.27 percent), forage cattle (1.85 percent), and cotton (1.31 percent).

The Invesco DB Agriculture Fund invests in liquid futures contracts traded on formal exchanges and as such has certain advantages over investing in physical commodities or traditional commodity indices. The Fund does not incur any costs for storing physical goods. It also does not have to bear the costs of entering into a commodity-linked debt obligation with a dealer, which is usually much higher than entering into an exchange-traded futures contract. All of this allows the fund to operate with lower expenses, which is reflected in its expense ratio.

To diversify the risk of investing in commodity futures contracts, this fund invests in US Treasury bonds, Money Market Funds and T-Bill ETFs. These investments are highly rated (AAA or AA) and have almost no default risk. This also allows the fund to earn interest on these securities and contributes to its total return. The Invesco DB Agriculture Fund invests in liquid futures contracts at publicly available prices on regulated futures exchanges. This gives investors more direct and cheaper exposure to soft commodities than buying commodity-linked debt securities, which are less liquid and not publicly traded.

The Invesco DB Agriculture Fund appears to be a risky fund

As a speculative fund, the Invesco DB Agriculture Fund carries a high degree of risk. Investors can lose a significant amount of money due to the extreme volatility of futures contracts. Therefore, this fund is not a good option for cumulative wealth accumulation. Instead, DBA can be viewed as a basket of diversified soft commodity futures. However, diversification across different soft commodities is not the same as diversification across sectors as it still suffers from unsystematic risks. Unsystematic risk is a type of investment risk inherent in an individual asset or a group of asset classes such as commodities or secured mortgage bonds.

Some investors may think that the expected food shortages due to the Russian invasion of Ukraine could help this index as people will buy more and more soft commodities to secure the food supply in the future. However, this logic has some limitations. Unlike the sourcing of energy and metals, most of the world’s governments do not seek to secure agricultural products through futures trading. Second, most of the commodities in which DBA has invested have little connection to Russia or Ukraine. For example, the production and supply of coffee, livestock, sugar, cocoa, beef cattle and cotton are hardly affected by this daring war.

bottom line

In theory, the Invesco DB Agriculture Fund should help hedge food inflation. Investors also get more direct and less expensive exposure to soft commodities than buying physical commodities or commodity-linked notes. However, these are not the goals of commodity ETF investors. Investors aim 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 excessive or too speculative to compensate for the high level of risk that investors have taken.

75 percent 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 growing from an extremely low base. This may have been further supported by speculation about food shortages related to the Russian invasion of Ukraine. In fact, the fund has made losses both in the very short term (8 percent over the past 6 months) and over the long term (30 percent over the past 10 years). DBA’s investment in completely unrelated products doesn’t help much either, as it doesn’t solve the fundamental limitations of this fund. The volatility of soft commodity futures raises enough skepticism among investors looking for steady wealth accumulation.