Sal Gilbertie, former head of the OTC Energy and Renewables Desk at Newedge USA, is the co-founder of Albuquerque, N.M.-based Teucrium, exchange-traded fund shop that specializes in futures trading of agricultural commodities.
Teucrium recently launched a family of funds that is jointly dubbed the Teucrium Agricultural Fund. That fund is seeded by the operation of single-product funds, including the Teucrium Corn Fund, Teucrium Soybean Fund, Teucrium Sugar Fund and Teucrium Wheat Fund.
Gilbertie recently spoke to Money Management Executive about the firm's latest ag product, how well its niche in the ETF business is faring and investors' misconception about agricultural commodities.
Tell us your motivation behind starting the firm and launching the TAGS Fund?
Two- and-a-half years ago when we started Teucrium, we had an idea for better next generation exchange-traded products focusing on our core competencies: energy and agricultural commodities. We had every intention of launching our energy products first but they're last to market. There were no ag single commodity ETPs in corn and that surprised us because corn is the second most pervasive commodity besides energy.
If you pull an SUV into a service station, you're using a bushel of corn. In the U.S., that's corn's number one use. Globally, that's corn's number two use. If you go inside and get beef jerky, globally that's corn's number one use: animal feed.
If you get some thing to drink, that's likely sweetened with corn sweetener. That's corn's number three use. If you sign that credit paper or read a magazine, that paper's held together by corn starch. That's corn's number four global use. So there's no possible way to escape corn if you're a participant in the modern economy.
Today is the culmination of a two-and-a-half year process with the TAG launch. This is the first time anyone has ever launched a fund of ETF funds. We have the space in single ag products. We charge no management fee on this new product because why would we do that? People want exposure to these four commodities and we believe the most efficient way to get this exposure is via this fund.
What is your methodology and do advisors and investors get your story?
It is based on a calendar so you know the underlying futures what we will hold and you can figure out for yourself 20 years from now. It's static so investors know exactly what they're buying.
Registered investment advisors tend to be the people who look at ETFs first because they're very sophisticated and independent and don't have to play by any rules. They understand that the liquidity is based on the underlying commodity and not the shares of the ETFs. Our holdings are spread out across the forward curve because if you look at your portfolio once a quarter or once a year, you want to participate with the pros who think about those commodities all day every day. The efficient pricing frontier occurs out the futures curve. You want your holdings to match the pros' holdings for the life of your investment.
Agricultural commodities are really a nascent part of people's portfolio. They use metals and energies and are just now realizing the wisdom of using ag products. With all of our launches, the responses were somewhat muted. People want to see a track record, even though that's irrelevant, because liquidity is based upon the underlying commodity.
What don't investors understand about ETF commodities, specifically agricultural ones?
I think the biggest hurdle for ETFs is that people don't understand their liquidity nuances. They see it trading a few hundred or thousand shares a day and they don't think it's liquid, and that's simply not the case. These things are as liquid as their underlying commodities so there's no amount of money that's going in there that's too big.
There's a very important rule that people need to understand and that is never trade a market order in an ETP. They should always use limits because in today's world, where markets are made by machines, because there are no more specialists standing on the trading floor. And that machine is hedging its purchase or sales to the investor. When an investor buys a corn ETF, the market maker is doing an e-arbitrage against corn futures. That market maker sells to the investor and hedges itself by buying the corn futures. The machines are programmed to react to markets as a defense mechanism.
It was also a bit surprising to us how little people understand how important ag commodities are to their portfolios. Almost everyone understands energy because they're energy users so they include energies in their portfolios. But what they don't understand is how integrated ag-commodities are in the economy and the supply side uncertainty of ag-commodites. There's no certainty that the seed you're planting in the ground will grow like there is in energy or in metals. You can drill a hole and know your reserves and depletion rate. You plant a seed in the ground and hope that it rains and the pests don't come.
So you're cornering the market for ag-commodity ETFs?
We actually don't view anyone as a competitor because we view our products as complementary to others that are out there. Most of the products out there are first generation so they focus on a single month close to spot and roll forward, so they're really good short-term trading vehicles. But they're not efficient for buy-and-hold investors, which is what we're designed for.
We're bringing products to a space that needed to be filled because no one else has single commodity ags. There is one sugar exchange-trade note in the U.S. but ETNs are very different animals. We stand alone in the ag space so if investors want to overweight or underweight a multi-commodity basket, that's where our products come in.
Hung Tran writes for Money Management Executive.