Exchange-traded funds, or ETFs, are investment funds that are listed on a securities exchange and provide exposure to a range of shares or assets with a single purchase. ETFs can be ‘managed funds’ or ‘index funds’, or in other words, active or passive.
The Australian Finance Podcast episode below explains ETFs, index funds and managed funds in more detail:
What’s Inside The BetaShares FOOD ETF?
The BetaShares Global Agriculture ETF seeks to track the performance of the Nasdaq Global ex-Australia Agriculture Companies Hedged AUD Index by investing in a portfolio of the largest agricultural companies in the world, excluding companies listed in Australia.
Together, these companies cover the entire value chain of agriculture. The largest exposure of this ETF is to packaged foods and meats (37.2%) followed by fertilisers and agricultural chemicals (21.5%) and farm machinery (15.7%). The fund has further allocations to agricultural products and trading companies and distributors; and small weightings to biotechnology companies and food distributors.
The FOOD ETF has 58 holdings with nearly half of the fund allocated to the US, 15% to Japan and 9% to Canada. Outside of these top three, the ETF is also exposed to Norway, Britain, Honk Kong, Germany, and Malaysia among other countries.
The ETF has been operating since August 2016, returning 5.57% per year after fees since inception. Over the last three years, the annual return has been 4.42%.
Outlook For Agriculture
The World Bank reports that agriculture accounted for one-third of global GDP in 2014, and that we will need to feed a projected 9.7 billion people by 2050.
While this sounds like promising growth potential, a collaborative report from the Organisation for Economic Cooperation and Development (OECD) and the Food and Agriculture Organisation (FAO) elaborates on the outlook over the next decade.
The report, which focuses on the outlook for 2018-2027, states that supply has been increasing whilst global demand growth is weakening, keeping commodity prices low. This slowing of demand growth is expected to continue over the next ten years.
The strongest growth is expected in Sub-Saharan Africa, South and East Asia, the Middle East and North Africa – areas in which the FOOD ETF provides minimal to no exposure.
In much of the developed world, growth is expected to be far lower, around half the growth rate of the previous decade.
Based on these findings, it appears possible that the single-digit growth seen over the last three years in the FOOD ETF may be as good as it gets.
Fees & Risks
The FOOD ETF has a management fee of 0.57% per year. With 58 holdings all in the agricultural sector, this ETF provides little diversification and should only be used as a small, tactical position rather than the core of a portfolio.
Exchange rate risk is always present with global ETFs, although the FOOD ETF is currency-hedged so some protection is in place. This is achieved by holding cash in multiple currencies and through the use of forward rate agreements.
The agricultural sector may look appealing at first glance due to population growth and the ever-expanding need to feed people. However, in reality there are reports of slowing demand and increasing supply, and a large majority of agricultural growth comes from developing markets.
I believe there are much better options on the ASX, like our number one ETF pick in the free report below.
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Disclosure: At the time of writing, Max does not have a financial interest in any of the companies mentioned.