Why I Won’t Be Buying TAGS
April 03, 2012
What’s a worse idea than buying four expensive single-commodity ETFs? Buying an even more expensive ETF that holds those four expensive single-commodity ETFs.
(Subsequent to the posting of this blog, Teucrium updated its website. Also, Teucrium has responded to this blog in a Q&A.)
The new Teucrium Agricultural Fund (NYSEArca: TAGS) lists its expense ratio on its home page as 0.32 percent, which would make it seem like one of the cheapest commodities baskets out there.
But when Alex Ulam here at IndexUniverse wrote about TAGS’ launch, he said the fund charged about 1.60 percent, giving it the dubious honor of being the most expensive commodities ETF on the market. What?
If you scroll to the bottom of the TAGS home page, you can download the TAGS prospectus. Once you open that prospectus, you’ll see Teucrium touting its 0.32 percent expense ratio all over the place; that is, until you get to page 34:
“While the Fund does not directly pay any management fees or certain other types of expenses, the Fund does pay certain expenses directly, including certain administrative and accounting expenses. In addition, the Fund bears a proportionate share of Underlying Fund expenses as a shareholder of the Underlying Funds. Each Underlying Fund pays management fees at an annual rate of 1.00% of its average net assets, brokerage charges, over-the-counter spreads and various other expenses of its ongoing operations (e.g., fees of the Administrator, Trustee and Distributor). Accordingly, the Fund has a total estimated expense ratio, including its proportionate share of Underlying Fund expenses, of approximately 1.6% of net assets (not including the transaction fees paid by Authorized Purchaser when purchasing or redeeming Creations Baskets).” (Italics added.)
Interestingly enough, the underlying funds—the Teucrium Corn Fund (NYSEArca: CORN), Teucrium Sugar Fund (NYSEArca: CANE), Teucrium Soybean Fund (NYSEArca: SOYB) and Teucrium Wheat Fund (NYSEArca: WEAT)—don’t actually charge 1 percent per year, they charge more.
CORN’s most recent prospectus says that the breakeven point at which CORN investors recoup their fees is 1.42 percent. Similarly, the CANE, SOYB and WEAT prospectuses all list their breakeven points at 1.53 percent.
It seems pretty obvious that there’s no way that an ETF that rebalances exposure to CORN, CANE, SOYB and WEAT would ever be able to do so for 0.32 percent. What isn’t obvious is why Teucrium decided to list its expense ratio as 0.32 percent without so much as an asterisk.
CORN, CANE, SOYB and WEAT’s home-page-listed 1 percent expense ratios all come with asterisks: “Management fee does not include the impact of other expenses, including commissions incurred in the trading of wheat futures contracts or other holdings.”
I’d rather see all expenses laid out for all to see, but an asterisk is better than nothing.
There are agriculture ETFs out there that are both up front about their fees and charge less than TAGS.
The PowerShares DB Agriculture Fund (NYSEArca: DBA), for example, lists its 0.85 percent management fee and its 0.16 percent estimated futures brokerage fee—for a total of 1.01%—directly on its home page.
In fairness to Teucrium, they reckon they’d beat DBA on price once TAGS achieves a certain scale. DBA has almost $2 billion in assets, so no one should be holding their breath for that day and, truth be told, DBA isn’t exactly cheap either.
Moreover, based on the expense ratios as they stand today, TAGS has to beat DBA by 0.60 percent for it to be competitive—a high hurdle to hit against a fund that is more diversified and optimizes its roll schedule.
Teucrium, of course, also somewhat optimizes its rolls by maintaining its exposure to three contracts along the futures curve and avoiding front-month contracts.
It remains to be seen whether Teucrium’s strategy will prove to be worth its higher cost.