VEGI - VEGI: Not Much Agriculture Production In This ETF

Summary

• The name of the iShares MSCI Global Agriculture Producers ETF implies that it offers exposure to companies producing agricultural commodities.
• Yet, the actual holdings primarily consist of companies that engage in business with farmers, but don’t operate/own farmland.
• While there’s a positive correlation with grains prices, actual agricultural commodities producers demonstrate better relationship with grains.

Following the Russian invasion in Ukraine, food security became a hot topic. As a result grains prices soared, which could have put the agricultural sector on investor’s radar. While most sectors of the economy have a wide variety of ETFs that offer exposure to them, this is not the case with agriculture.

The iShares MSCI Global Agriculture Producers ETF ( VEGI ) is one of the few options and has gathered serious interest as evident from the sharp jump in AUM in H1’22. However, a closer look at the ETF indicates that unlike its name may suggest, the exposure to actual agricultural producers is very low. Instead, the fund is full of companies that base their business around the agriculture production, but don’t own or operate any farmland themselves. While VEGI’s correlation with grains prices is positive, stocks of actual farmers demonstrate stronger relationship with commodity prices.

VEGI overview

According to its prospectus , the fund aims to track the performance of the MSCI ACWI Select Agriculture Producers Investable Market Index using a representative sampling technique. VEGI aims for at least 80% exposure to its benchmark, while the remaining funds could be invested in various instruments including derivatives. While the sampling technique produces less than perfect tracking of the index, it allows for an expense ratio of 0.39%, which is reasonable, given the relatively small AUM of the ETF.

While as of 31 Jan 2023, the ETF includes 162 holdings, the top 10 positions in terms of weighting take more than 61% of the total. At the same time, the largest position – Deere & Company ( DE ) takes almost 21% of total assets. However, DE is a manufacturer and distributor of agricultural equipment, but doesn’t produce any grains. So while the business is connected to agriculture production in a sense that when farmers are in good financial condition, demand for DE’s products should be rising and vice versa, the relationship with grains is not straight forward.

The remaining members of top10 holdings are mostly producers of seeds, fertilizer and chemicals – Corteva ( CTVA ), Nutrien ( NTR ), Mosaic ( MOS ) and FMC Corporation ( FMC ). There are two other equipment producers besides DE – CNH Industrial and Kubota Corp. Only two of the top 10 holdings are directly engaged with food production – Archer-Daniels-Midland Company ( ADM ) and Bunge ( BG ). However, these two companies are not producing the grains themselves, rather are buying them from farmers and then trading/processing them.

While none of the top 10 holdings of VEGI produces any grains themselves, they don’t own meaningful amounts of farmland as well. Having this in mind, the name of the ETF – iShares MSCI Global Agriculture Producers seems misleading as actual agricultural producers are not a significant part of the fund’s holdings.

Correlation with grains

Even though the ETF doesn’t offer meaningful exposure to grains producers it may still exhibit high correlation with grain prices, therefore be an adequate tool for exposure to them. In order to examine this, I’ll compare the correlation of daily returns of the S&P GSCI Grains Index, which tracks grains prices with the daily changes of VEGI as well as two companies that are actual agricultural producers – Adecoagro ( AGRO ) and BrasilAgro ( LND ).

The data indicates, that VEGI has positive correlation with grains, therefore in a bull market for agricultural commodities, the ETF should benefit too. On the other hand, actual farmers exhibit much stronger correlation with grains prices.

Conclusion

While the name of the ETF – iShares MSCI Global Agriculture Producers may trick some market participants into thinking that by buying the instrument, they’re getting exposure to agriculture production, the reality is different. The holdings of the fund consist of mainly agricultural equipment producers as well as seeds, fertilizers and chemicals producers. Companies, which have farming as their core business don’t have a meaningful presence in this ETF, while unsurprisingly exhibit higher correlation with grains prices than VEGI. For these reasons I don't consider VEGI a good way to get exposure to agricultural commodities.

For further details see: