Thomas Barwick/DigitalVision via Getty Images
The Teucrium Wheat Fund ETF (WEAT) is a low-cost futures exchange-traded fund designed to provide investors with exposure to the price of wheat futures. Rather than investing in a diversified commodity index as with most commodity-based ETFs, WEAT offers single-commodity exposure for those seeking direct exposure to the price changes of wheat, whether as a speculative trade or as an investment hedge. Given that WEAT is a passively managed strategy, investors should not expect excess returns beyond the price changes in wheat futures.
About Teucrium Wheat Fund ETF
WEAT was launched by Teucrium on September 19, 2011 on the NYSE Arca Exchange. The strategy has a moderate net expense ratio of 62 bps, on par with peer commodity ETF strategies. WEAT exhibits narrow liquidity with $292 million in net assets with an average of $18 million in share value changing hands on a daily basis, at the time of writing.
Seeking Alpha
WEAT was designed to track the Teucrium Wheat Index [TWEAT], which is the measurement of the weighted average of the combination of 3 staggered futures contracts for wheat. WEAT will invest 100% of the funds into the futures contracts that make up TWEAT and will not apply leverage to the fund. WEAT is considered an indirect investment in wheat as a commodity given that the holdings are futures derivatives.
The portfolio is made up of 3 distinct sleeves: short-, medium-, and long-term exposure. The fund will gain this exposure by generally investing roughly 35% in both short- and long-term futures contracts and 30% in medium-term futures contracts. In accordance with WEAT’s current holdings, short-term exposure may range from 2 to 3 months to expiration, medium-term exposure is 6 months to expiration, and long-term exposure is 1.5 years out. In addition to wheat futures contracts, WEAT may invest in other assets with excess funds, such as investment-grade paper or other interest-bearing assets. For example, WEAT holds commercial paper of companies like the Goldman Sachs Group, Inc. (GS), The Sherwin-Williams Company (SHW), and Marriott International, Inc. (MAR), among others. This is so that it can generate some interest from relatively safe securities on parked funds.
Why Invest in Commodities?
Commodities are generally viewed as a market hedge, exhibiting limited correlation to the broader equity market. While most commodity strategists offer diversified or managed exposure, WEAT solely provides exposure to wheat futures, effectively increasing risk by comparison.
Commodity futures are broadly traded among speculative traders seeking to gain on price dispersions as well as commodity producers to hedge pricing risk. The commodity futures markets are generally liquid given the broad trading depth across producers and traders and may be reflective of the expected price of the underlying commodity over time. As the futures contract nears expiration, the contract will begin to converge with the spot price of the underlying commodity, allowing the contract holder to sell the contract at a premium or discount to the spot price and/or roll forward to the next period for continuous exposure.
Investor Suitability
WEAT can best be utilized by speculative traders seeking direct exposure to the wheat market. While commodity futures strategies are generally viewed as a market hedge, investing in a single commodity may bear similar market risks as would the equity market. WEAT could also be utilized to hedge risk if an investor holds equities tied to producers of wheat-related products like cereals or bread, like General Mills, Inc. (GIS) or Flowers Foods, Inc. (FLO). WEAT could also be utilized as a market indicator for the performance of these companies, as wheat is considered an input cost; pairing the Consumer Price Index [CPI] to gain information regarding the general direction of selling prices for products like bread and cereals with the general price of wheat, investors may gain insights into how these companies may perform in the future.
Risks Related to WEAT
WEAT is a single-commodity ETF designed to provide investors with exposure to the price changes in wheat, presenting certain risks that should be considered prior to making a final investment decision. WEAT is a passively managed investment strategy and provides limited upside potential beyond the price changes with respect to the underlying commodity, meaning that WEAT will not attempt to earn alpha for investors. This is exemplified by its ~80% drawdown since inception to today. However, there are notable times when it experienced a considerable price upswing, like in early to mid-2022.
While many investors utilize commodity portfolios to hedge market risk, investing in a single commodity may bear greater risk due to the speculative nature of commodity pricing. The price of wheat and wheat futures may be influenced by a variety of exogenous factors, such as weather, international trade, government policies, fertilizer prices, drought, interest rate policy, and inflation, among others.
Final Thoughts
WEAT can be utilized by investors as a trading vehicle for direct investment in wheat futures. As a passively managed ETF, WEAT will provide direct exposure to the basket of wheat futures without the intent of earning excess returns on the funds. WEAT may be considered as a speculative trading vehicle given the single-commodity exposure and may not effectively hedge against market risk as would a diversified commodity fund.
This article answers three main questions about WEAT:
- How does WEAT relate to wheat prices, and what are its holdings?
- What risks accompany WEAT?
- How should WEAT be used in a portfolio?
Editor’s note: This article is intended to provide a general overview of the ETF for educational purposes only and, unlike other articles on Seeking Alpha, does not offer an investment opinion about the ETF.
