DBA: A Simple Diversified Commodity ETF Beating The S&P 500

A smart and successful way to diversify your portfolio over the last few years has been to own a basket of commodities through the Invesco DB Agriculture Fund ETF (NYSEARCA:DBA). Believe it or not, it actually has been “outperforming” investment returns in the red-hot S&P 500 equity index, America’s leading blue-chip construction with an oversized weighting in Big Tech winners.

The good news for DBA investors: high levels of cash earning 5%+ for yield annually on top of rising prices for owned cocoa, coffee, and livestock futures have been a terrific combination to hold in your account since early 2023. Even better news is basic grains have lagged (fallen, actually) since 2021. So, any uptick in corn, soybeans, wheat and/or sugar, cotton could push DBA gains even higher for the rest of 2024.

The technical chart readout for DBA itself is very bullish. Momentum indicators are signaling all-systems go. Measured from the beginning of 2024, the Accumulation/Distribution Line, Negative Volume Index, and On Balance Volume numbers have been incredibly strong and healthy. While corrections and hiccups in price will surely appear, cumulative gains appear to be well-supported in this commodity pool’s supply/demand setup.

Unique Dual-Purpose Design

Investors in DBA are getting a twofer on their money. With notational commodity futures representing 99.9% of the fund’s value, another nearly 98% in underlying value is also held as U.S. Treasury investments. How? Futures contracts often require very little for a margin down payment to open a long position on the exchanges. The end result is rising agriculture prices stacked on higher-than-normal cash yields are both adding to the gains in this unique ETF design.

For costs, roughly 0.93% in annual management fees and estimated futures brokerage transaction costs are taken yearly, while futures contracts may involve contango for pricing. Varying “premium” expenses over spot commodity prices (depending on market conditions) are often priced into futures. What this means is futures owners typically hold time-decay expenses in a portfolio of positions. However, sizable gains in just one or two different commodities can carry DBA forward.

Below is a complete list of futures contracts and government securities held on April 18th, 2024, taken from the Invesco website here.

Total Returns Relative to S&P 500

The ETF’s total return performance of +27.3% over the last year has been astounding, to say the least. Included in this figure, DBA has paid a 3.6% trailing dividend, largely funded by cash-earning interest. This TR advance has now passed the S&P 500 for relative gains, with the substantial April turn lower in equity prices. Absent any fanfare, the Invesco DB Agriculture Fund ETF advance for investors (owning 11 different commodities) has now bested the SPDR S&P 500 ETF (SPY) over all time periods from 1-month to 3-years!

I have charted a variety of performance spans below. You have to go back to a 5-year chart (before the COVID pandemic money printing appeared in 2020) to find the U.S. stock market beating a combination of ag commodities and cash returns for net gains.

1-Month Total Returns

3-Month Total Returns

6-Month Total Returns

12-Month Total Returns

3-Year Total Returns

5-Year Total Returns

In terms of DBA’s +27.3% total return advance over the past 12 months, approximately +20% of the profits came from a steep jump in cocoa prices, with another +5% from Treasury bill dividend income. The other 10 commodities have netted out to a minor gain of +2%.

Why are cocoa prices high? The market is worried that cocoa bean shortages out of West Africa could take 3 to 5 years to achieve a normalized balance in the marketplace (on new plantings and better weather), as finished chocolate consumption globally has proven very inelastic for demand. Forecasts remain for 2% annual growth in final demand for cocoa into 2030.

According to a Financial Times article this week:

Farmers in Ghana and Ivory Coast, who together produce about two-thirds of global cocoa supplies, have faced a double blow of disease outbreaks and adverse weather, driven by climate change and the El Niño weather phenomenon. This has curbed output by more than a quarter in Ivory Coast, the world’s biggest producer.

One important worry for stable ag commodity pricing generally around the world is climate change. Record hot temperatures on the planet in 2023-24 could lead to shortages of many food items going forward as precipitation patterns are altered by rising temperatures. For sure, climate change could be a catalyst for future DBA quote gains, on top of the high odds of dramatic central bank money printing to counterbalance record business/consumer debts globally.

Final Thoughts

The risks of a major cocoa price crash or a recessionary drop in food demand are the two downside ideas to weigh in your short-term investment process.

On the flip side of the coin, the primary bullish logic to consider buying DBA may come from the fact the Federal Reserve seems to want higher inflation rates over time. The banker’s central bank hasn’t raised interest rates since 2023, despite sharply rising industrial commodities like crude oil, silver, copper in 2024. My concern is that any new advance playing out in ag commodities soon will only serve to increase the rate of inflation later in the year.

What if a lower U.S. dollar in foreign exchange trading is approaching as a vote of “no confidence” in the Fed’s reluctance to slow another spike in inflation? Then commodities overall will have solid footing for further advances in price, and the Invesco DB Agriculture Fund ETF will remain a winning choice for investors into 2025.

Another point to ponder is any effort by the Fed to lower interest rates on the appearance of a recession could cause a flood of buying capital to flow into commodities (similar to the pandemic spike in basic prices in the economy during late 2020 and 2021). The anticipation of yet more money printing and new rounds of inflation for businesses and consumers alike next year may convince forward thinkers to rush into commodity hedges.

In this respect, DBA stands out as a great risk-reward inflation play for your portfolio. It’s already proven a productive and efficient diversification tool, no doubt about it. Maybe, the good times will keep rolling in cocoa, and expand into lagging grains. I think the above-average odds of future commodity gains over time suggest investors hold DBA.

In addition to climate change helping pricing on the edges, the overriding long-term rationale for higher commodities is backed by the mathematical necessity for continuing paper currency devaluations in my view. I believe soft-default scenarios to keep $34 trillion in potentially unpayable U.S. Treasury debts solvent are hard to ignore.

And, in a stagflation world like the 1970s (which is turning into a high-probability event to me), overvalued Wall Street equity quotes (discussed in many of my Seeking Alpha efforts in late 2023 and early 2024) may actually decline in price. If interest rates rise instead of fall (as now expected by investors, analysts, and the Fed), Wall Street could be in serious trouble for the rest of the year. In the end, strong ag commodity performance could easily run circles around flat to lower trends in regular stock market investments for years to come.

I rate the diversified Invesco DB ag commodity fund product a Buy, with a plan to purchase a stake in the coming weeks.

When your financial guru friends talk about the unstoppable forces in Big Tech, you can now remind them plain old commodities are perking up also, with a diverse basket of ag futures advancing just as nicely outside of the spotlight.

Note: DBA sends out a K-1 income statement annually for taxable accounts.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.