Agricultural vs Broad Commodity ETFs: Which is the Better Diversifier?

Navigate volatility. Enhance diversification. Uncover growth.

Diversification is essential for building resilient portfolios, and commodity ETFs have become popular tools for their inflation-hedging properties and low correlation to traditional assets. However, not all commodity ETFs are created equal.

While broad commodity ETFs provide exposure across multiple sectors, they often concentrate heavily in energy markets (and metals), amplifying volatility. Agricultural ETFs, by contrast, focus on critical markets like food and grain commodities, offering distinct diversification benefits.

What follows is a comparison of these two approaches, exploring their strengths, risks, and strategic applications to help advisors construct better-diversified portfolios.

1. Broad Commodity ETFs: Strengths and Shortcomings

Broad commodity ETFs aim to provide comprehensive exposure across energy, metals, and agricultural sectors. With several funds managing billions in assets, they’re a convenient option for general commodity market access.

However, their broad approach often skews heavily toward energy and metals, introducing significant volatility and economic sensitivity. For example, indices like the S&P GSCI (“GSCI”) and Bloomberg Commodities Index (“BCOM”) allocate over half their weight to energy and metals commodities. This overexposure amplifies risk during oil price fluctuations or periods of economic instability, potentially limiting the diversification benefits.

Takeaway: Broad commodity ETFs provide general diversification but can fall short due to their overexposure to energy and metals, which can amplify risk and volatility.

2. Broad Commodity ETFs: Vulnerable in Bear Markets

A key expectation of diversification is resilience during equity market corrections or bear markets. However, broad commodity ETFs often fall short of this goal. (We’ll soon see how the data underscore the strength of agricultural ETFs during equity bear markets.)

In four of the last seven equity corrections, the GSCI suffered double-digit drawdowns, sometimes exceeding losses in equities. While the GSCI provided substantial inflation hedging during events like the 2022 inflation surge and remained flat in 2023, these examples highlight its inconsistency. Its reliance on energy and metals can make it vulnerable to sharp market swings, limiting its effectiveness as a reliable diversification tool.

Takeaway: Broad commodity ETFs may be an effective inflation hedge. However, inconsistent protection from equity market drawdowns does not make broad commodity ETFs a reliable source of portfolio resilience, highlighting the need for more stable diversification strategies.

3. Agriculture: Historical Resilience in Bear Markets

When equity markets falter, diversification becomes essential for protecting portfolios from severe drawdowns. The Teucrium Agricultural Index has consistently demonstrated superior resilience, outperforming both equities and broad commodity indices in seven of the last seven major corrections and bear markets.

This consistent outperformance underscores the defensive qualities of agricultural markets. Unlike energy and metals, which dominate broad commodity indices and are highly sensitive to economic cycles, agricultural markets are driven by structural demand trends such as food security and global population growth.

When examining average declines across these equity drawdown periods, the results are even more striking:

• The GSCI and equities both suffered average double-digit losses.
• The Teucrium Agricultural Fund Index posted an average decline of only -1.14%.

A history of mitigating drawdowns and providing effective diversification when it matters most suggests the agricultural index offers advisors a valuable strategy for constructing resilient portfolios. Avoiding the volatility of energy and metals may further enhance the index’s appeal for potential stability during turbulent times.

Takeaway: The Teucrium Agricultural Fund Index has provided a consistent defensive edge during equity drawdowns, historically outperforming broad commodity indices and equities in most drawdowns. This resilience underscores agriculture’s value as a diversification tool, helping advisors construct portfolios that may help weather market turbulence more effectively.

4. Agricultural ETFs: Low Correlation to Stocks and Bonds

Another key advantage of agricultural ETFs is their low correlation to other asset classes, making them a potentially powerful tool for portfolio diversification. As shown in the table below, a diversified index of agricultural ETFs exhibits minimal, near-zero correlation to stocks and bonds. This characteristic can help reduce overall portfolio volatility and improve risk-adjusted returns.

The table also reveals how broad commodity ETFs, represented by the GSCI and BCOM, tend to exhibit higher correlations to equities. This higher correlation, combined with the elevated bear market volatility shown earlier, underscores their limitations as diversifiers compared to agricultural ETFs.

Takeaway: Incorporating exposure to agriculture in a diversified portfolio can enhance resiliency, reduce correlations, and improve risk-adjusted returns over time.

5. Long-Term Trends Favoring Agricultural ETFs

The agricultural sector is supported by powerful macroeconomic drivers:

• Population Growth: Rising demand for grains to support human and livestock needs.
• Middle-Class Expansion: Rising incomes and increased consumption of protein-rich diets drives grain and soybean demand.
• Production Constraints: Limited U.S. farmland growth shapes global supply dynamics.

By aligning portfolios with these global trends, advisors can tap into growth opportunities that are less correlated with traditional economic cycles. These trends also position agricultural markets for sustained growth, making agricultural ETFs a potentially attractive long-term investment.

Takeaway: Agricultural ETFs are positioned to capture favorable long-term trends, making them worthwhile to consider for diversified portfolios.

6. Selecting an Agricultural ETF

What’s your next step if you seek to tap the defensive benefits and macro potential of Agricultural ETFs? These ETF focus exclusively on essential commodities like corn, wheat, soybeans, and sugar. This targeted exposure offers investors unique opportunities to benefit from market dynamics driven by food security and global population trends.

At Teucrium we offer both diversified and single commodity agricultural ETFs:

• Diversified ETFs provide exposure to a mix of the key agricultural markets without the complexity of trading futures or physical commodities.
• Single-Commodity ETFs can offer precise exposure to specific agricultural products.

Takeaway: Agricultural ETFs enable investors to target specific markets with distinct risk/return profiles, offering flexibility in portfolio construction.

7. Practical Portfolio Applications

Agricultural ETFs can be used strategically when seeking to enhance diversification and improve portfolio resilience. Advisors typically incorporate agricultural ETFs using one of two primary approaches:

• Standalone Diversifiers: Replace broad commodity ETFs entirely for more focused exposure to agricultural markets.
• Complementary Tools: Include agricultural ETFs alongside a broader commodity strategy as part of a “Core and Explore” approach.

For instance, adding TAGS or TILL to a multi-asset portfolio may help reduce overall portfolio volatility while improving risk-adjusted returns.

Takeaway: Thoughtful integration of agricultural ETFs may improve risk-adjusted returns and enhance portfolio flexibility. By incorporating agricultural ETFs, advisors can construct more balanced and resilient portfolios that cater to a wide range of client needs.

Explore Agricultural ETFs

Agricultural ETFs offer investors a focused and simple way to diversify portfolios, historically complementing or surpassing broad commodity ETFs in key areas like downside protection and alignment with long-term trends. By leveraging these tools, advisors may build more resilient portfolios, navigate volatility, and capture growth.

Explore Teucrium’s agricultural ETFs and discover how they may enhance your portfolio strategies. Schedule a consultation today to learn more.

Important Disclosures and Risks:

An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. The prospectus and, if available, the summary prospectus contain this and other information about the Fund. You may obtain a prospectus and, if available, a summary prospectus by calling 720-651-8092 or visiting www.teucrium.com. Please read the prospectus or summary prospectus carefully before investing.

This material is not an offer or solicitation of any kind to buy or sell any securities outside of the United States of America.

Shares of the Funds are not FDIC Insured, may lose value, and have no bank guarantee. All supporting documentation provided upon request.

CORN, CANE, SOYB, WEAT, and TAGS are commodity pools regulated by the Commodity Futures Trading Commission (CFTC). These Funds, which are ETPs, are not mutual funds or any other type of Investment Company within the meaning of the Investment Company Act of 1940, as amended, and are not subject to regulation thereunder. The funds do not track the spot price of corn, sugar, soybeans or wheat. Because the Funds will invest primarily in commodity futures contracts and other derivative instruments based on the price of the underlying commodities, an investment in the Funds will subject the investor to the risks of that commodity market, and this could result in substantial fluctuations in the price of the Funds’ shares.

TILL, CXRN, and WXET are new and have a limited operating history. The Funds are “non-diversified” investment companies under the Investment Company Act of 1940, as amended and, therefore, may invest a greater percentage of assets in a particular security than a diversified fund. The Funds are commodity pools regulated by the CFTC.

 CXRN and WXET are subject to leverage risk. Leverage may cause the Funds to be more volatile because it may exaggerate the effect of any increase or decrease in the value of the Funds’ portfolio securities. Futures trading involves a degree of leverage and as a result, a relatively small price movement in reference asset may result in immediate and substantial losses in the Funds. The Funds may at times be required to liquidate portfolio positions, including when it is not advantageous to do so, in order to comply with guidance from the U.S. Securities and Exchange Commission (the “SEC”) regarding asset segregation requirements to cover certain leveraged positions. The Funds carry distinct risks, using leverage that makes it riskier than similar funds without leverage. It may not be suitable for all investors and should only be considered by knowledgeable investors who understand the effects of compounding and daily leveraged (2x) investment returns. Designed for short-term trading, the Funds requires active, frequent (even daily) management and is unsuitable for investors who do not actively monitor and manage their portfolio. Investors could lose the full principal value of their investment in a single day.

Futures Risks: Commodities and futures generally are volatile and are not suitable for all investors.

Futures investing is highly speculative and involves a high degree of risk. An investor may lose all or substantially all of an investment. Investing in commodity interests subject each Fund to the risks of its related industry. These risks could result in large fluctuations in the price of a particular Fund's respective shares. Funds that focus on a single sector generally experience greater volatility. 

Commodities futures is subject to market risk. Market risk is the risk that the value of the investments to which the Funds are exposed will fall, which could occur due to general market or economic conditions or other factors.

Actively managed funds do not seek to replicate the performance of a specified index, may have higher portfolio turnover, and may charge higher fees than index funds due to increased trading and research expenses.

An investment in the Fund involves risk, including possible loss of principal. Exchange-traded funds (ETFs) trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETF's net asset value (NAV), and are not individually redeemable directly with the ETF. Brokerage commissions and ETF expenses will reduce returns. ETFs are subject to specific risks, depending on the nature of the underlying strategy of the Fund, which should be considered carefully when making investment decisions. For a complete description of the Fund’s principal investment risks, please refer to the prospectus.

Indices are unmanaged and investors cannot invest directly in an index.

The S&P GSCI serves as a benchmark for investment in the commodity markets and as a measure of commodity performance over time. It is a tradable index that is readily available to market participants of the Chicago Mercantile Exchange. The index was originally developed in 1991, by Goldman Sachs. In 2007, ownership transferred to Standard & Poor's, who currently own and publish it. Futures of the S&P GSCI use a multiple of 250. The index contains a much higher exposure to energy than other commodity price indices such as the Dow Jones-UBS Commodity Index.

The Bloomberg Commodity Index (BCOM) is a broadly diversified commodity price index distributed by Bloomberg Index Services Limited, designed to provide exposure to commodities as an asset class, with a focus on market liquidity and diversification.

The Standard & Poor's 500 Total Return Index (SPTR) is an unmanaged group of securities considered to be representative of the stock market that tracks capital appreciation as well as distributions. It is a market value weighted index with each stock's weight in the index proportionate to its market value. The Total Return index assumes that all cash distributions (dividends and/or interest) are reinvested.

The Teucrium Agricultural Fund Index is a rules-based benchmark designed to reflect the performance of a diversified portfolio of agricultural commodities. It typically tracks a weighted basket of futures contracts on key U.S.-traded agricultural products such as corn, soybeans, wheat, and sugar. The index aims to provide exposure to the price movements of these core commodities while mitigating some of the seasonality and volatility found in individual contracts. It serves as the underlying index for the Teucrium Agricultural Fund (Ticker: TAGS), an exchange-traded fund (ETF)

The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based benchmark that measures the performance of the U.S. investment-grade bond market. It includes a wide range of fixed-income securities such as U.S. Treasuries, government-related and corporate bonds, mortgage-backed securities (MBS), and asset-backed securities (ABS). To be included, securities must be investment-grade, dollar-denominated, and have at least one year remaining to maturity. The index is widely regarded as the standard measure of the performance of the U.S. bond market and is often used by investors to track market trends or as a benchmark for bond portfolios.

Teucrium Investment Advisors, LLC is the investment adviser for TILL, CXRN, and WXET. Teucrium Trading, LLC is the Sponsor for CORN, CANE, SOYB, WEAT, and TAGS.

PINE Distributors LLC is the distributor for TILL, CXRN, and WXET, and the Marketing Agent for CORN, CANE, SOYB, WEAT, and TAGS, and is not affiliated with Teucrium Investment Advisors, LLC and Teucrium Trading, LLC.

Teucrium Investment Advisors, LLC is an investment adviser in Burlington, Vermont and is a wholly owned limited liability company of Teucrium Trading, LLC. Teucrium Investment Advisors, LLC is registered with the Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. Teucrium Investment Advisors, LLC only transacts business in states in which it is properly registered or is excluded or exempted from registration. 

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