VEGI - VEGI: A Good Fund But Momentum Challenged

2023-10-27 10:16:51 ET

Summary

• iShares MSCI Agriculture Producers ETF offers exposure to global agribusiness companies in the agriculture sector.
• The VEGI ETF is a relatively small fund with a low expense ratio and a good number of holdings.
• The ETF has underperformed in recent years but could benefit from the focus on food security and changes in commodity prices.

There is no sincerer love than the love of food. - George Bernard Shaw.

Unpopular opinion: food matters more than artificial intelligence ("AI").

If we agree on that, it's time to talk about the iShares MSCI Agriculture Producers ETF ( VEGI ). This exchange-traded fund offers investment exposure to the global equities of companies primarily engaged in the business of agriculture. This ETF seeks to track the investment results of an index composed of these agribusiness companies. Seems like a no-brainer. The only problem is momentum just isn't there...yet.

Investment Premise

VEGI is not just another ticker symbol in the ETF universe. Its investment proposition is tied to its ability to provide exposure to international companies that function in the highly critical agriculture sector, manufacturing fertilizers, agricultural chemicals, farm machinery, and related packaged food items. These companies are significant contributors to the global agribusiness market, an industry that is estimated to be worth about $4 trillion.

The fund uses a representative sampling technique to match the performance of the MSCI ACWI Select Agriculture Producers Investable Market Index. The ETF aims to maintain at least an 80% exposure to its benchmark. In terms of expense, VEGI charges an annual operating fee of 0.39%, making it one of the least expensive products in the space.

This is a relatively small fund. VEGI had net assets amounting to $171,320,887. The ETF has a beta of 0.90, suggesting its volatility is slightly less compared to the market. The 30-Day SEC Yield of the fund is 2.04%. The fund has a good number of holdings, with 154 different positions. The P/E ratio of the fund is 9.13, while the P/B ratio stands at 1.86.

Put simply - this is an under-looked part of the marketplace that is relatively cheap from a valuation perspective in an important segment of the global economy which will only grow as more emerging market consumers enter the middle class. From that standpoint, I'd argue it's actually a compelling fund to invest in over the longer term.

Top Holding Components

Keep in mind that while it has 154 positions, VEGI's portfolio is quite concentrated, with the top 10 holdings accounting for more than 30% of the total fund. The largest position is held by Deere & Company (DE), accounting for approximately 22.66% of the total assets. Other significant holdings include Archer-Daniels-Midland (ADM), Corteva, Inc. (CTVA), Nutrien Ltd, and CF Industries Holdings Inc. These companies play a crucial role in shaping the performance of the fund, with Deere obviously the biggest opportunity and risk for driving future performance given its sheer weight.

Performance Analysis

No surprise that VEGI has underperformed this year given AI mania, but what's interesting is that it really hasn't outpaced the S&P 500 (SP500) for any sustained period for a decade. Makes some sense, as the tech dominance cycle characterized what drove U.S. equities, but it's clear that valuations haven't been enough to get some real relative momentum to kick in.

When compared to other ETFs in the space, VEGI holds its ground. The VanEck Agribusiness ETF (MOO), which tracks the MVIS Global Agribusiness Index, has a larger asset base of $912 million, but it also charges a higher expense ratio of 0.53%. Despite these differences, both funds offer a unique perspective on the agribusiness sector and can be considered complementary investment options. VEGI had a stretch of underperformance relative to MOO, has been strong as of late, but over the last several years the difference between the two has been minimal.

Current Market Scenario and Outlook

With the Russian invasion in Ukraine, food security has become a hot topic, causing grain prices to be a focus point for investors. This could put the agricultural sector, and by extension, VEGI, in the spotlight for some time. However, the ETF's momentum just isn't there, and the increasing volatility of global stock markets likely won't help. Going forward, the ETF's performance will likely be influenced by various factors, including changes in commodity prices, operating efficiencies of the companies in its portfolio, and shifts in inflation trends.

I like iShares MSCI Agriculture Producers ETF, and think it's a good area to invest in long-term. Just don't be disappointed if it doesn't perform as well as the broader market, given investor focus on technology and P/E expansion over what we actually need to live.

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