Wednesday, August 17, 2011
There's a frenzy in the corn market.
A combination of ethanol demand, inflation, and poor weather has lifted corn prices to new heights. Recently, the drought in the U.S. farm belt and a shortage in Mexico have pushed the golden grain even higher. The price is up 131% in two years.
Until June 2010, only commodity traders could directly invest in corn. (Some funds keep a portion of their assets in corn, but there were no "pure play" corn funds.)
However, with the massive rally creating demand from "mom and pop" investors, the market couldn't resist creating a new fund for these folks: CORN, managed by Teucrium Funds, a new company founded specifically to create commodity funds.
I'm a long-term agriculture bull... the potential demand from emerging markets like India and China is stupendous. But I'm not buying CORN. Here's why...
As you would expect, the fund doesn't actually buy and sell corn kernels. Instead, it uses futures contracts in its strategy. CORN's managers buy those futures contracts in an attempt to match (within 10%) the performance of the actual price of real corn.
Since its inception, CORN is up 90%, outpacing corn spot prices. Take a look...
If you hold shares in CORN, you've got to be patting yourself on the back right about now. But there's a problem here... I spoke with a former commodities trader about CORN. He told me this kind of fund is a "sitting duck" for professional traders.
The fund has to "roll" its futures contracts over. Basically, it means that on a set day, it needs to sell the old contracts and buy new ones, trading about 35% of its assets each time. The fund is like a poker player with his hand showing and his next bet written on his forehead. According to my friend, a fund locked into a predictable system will bleed 1% or so on every "roll."
CORN has to "roll" five times per year, according to its system. That kind of capital erosion will hurt shareholders, particularly when prices are falling or sideways.
Over the past six months, for example, corn hasn't gone much of anywhere. And as you can see in this next chart, the CORN fund is starting to underperform the spot price of corn.
From February 2011 to today, corn spot prices showed a gain twice as big (+12%) as the CORN fund (+6%). That's the trouble with futures funds... and it's critical that investors understand this problem.
And that's not the only problem here...
For one, Teucrium is new at this. It just got started last year. And it's only running three commodity funds now. For another, CORN has high maintenance fee: 1.49%.
If the corn price begins another big rally, you might end up ahead on CORN. But be cautious. It's a fund designed to bring in fees for Teucrium. If corn prices trade sideways or down, you'll likely do even worse.
I'm not trying to knock Teucrium for producing vehicles investors say they want. They're simply responding to demand. But investing is just as much about knowing what to AVOID investing in as it is knowing what to invest in. And I recommend avoiding any high-cost vehicle that can "bleed" your money away in a sideways market.
If you're an agriculture bull, you're better off looking for big landowners or watching the blue-chip fertilizer companies like Mosaic and Potash for a chance to buy in cheap.
Brian Hunt has highlighted a couple other candidates for "World's Worst ETF."
The commodity that Candidate No. 1 tracks "has gained around 40% since striking a bottom in mid-2010," he writes. "Hamstrung by its futures strategy, [this ETF] has lost investors 40% of their money during the same time!"
And when the S&P 500 neared a yearly high in July, Candidate No. 2 "just hit a yearly low." This ETF is "able to lose money and market value in both good times and bad."
Gold and silver are up 12% and 2%, respectively, over the past month... both uptrends look strong.
Yamana Gold, Eldorado, and Randgold Resources top the short list of stocks that are up 10%-plus in the past month.
Netflix uptrend in danger... down more than 20% from last month's highs.
Pipeline giants Enbridge, El Paso, and Magellan Midstream Partners are all up more than 10% so far in 2011.