Andy Hagans sits down for an interview with Sal Gilbertie, president and co-founder of Teucrium.
ETF Reference editor-in-chief Andy Hagans recently interviewed Sal Gilbertie, President of Teucrium. Teucrium is a leader in the commodity ETF space, offering investors unleveraged exposure to major commodities via their exchange-traded products. The interview was completed over email in May of this year.
Andy Hagans: Teucrium’s website, literature, and overall approach seem geared toward “everyday investors,” which is relatively rare for commodity funds. In your article Adding Commodities to a Portfolio, you make the case that a proper commodities allocation can increase the risk-adjusted returns of vanilla, 60/40 type portfolio. Do you think most retail investors and advisors are catching on to this and adding commodities allocations where they previously had none?
Sal Gilbertie: Retail investors and their advisors are beginning to understand the importance of direct commodity exposure in their portfolio composition. The ready availability of a wide variety of single-commodity Exchange Traded Products (ETPs) on the major exchanges is finally enabling investors to replicate what institutions have been doing with commodities for decades. Our website is designed to assist investors and advisors with all aspects of ETP investing, including education about the importance of agricultural commodities. Retail investors are beginning to see the potential advantages of commodities in a balanced portfolio. Teucrium believes that we only see the tip of the iceberg in terms of investor interest in commodity-based ETPs.
As commodity professionals, we watched institutions and professional investors embrace the inclusion of commodities in their portfolio construction in the 1990s and very early 2000’s; this access was often gained through direct investments or through structured bank products unavailable to non-institutional clients. Retail investors were actually only able to easily invest in commodities via the introduction of a few early broad-basket commodity ETPs, along with a handful of single-commodity gold and energy-related ETPs, less than a decade ago. About five years ago, Teucrium saw the need to provide easy commodity access to non-institutional investors, especially to grains, through the ETP mechanism, which is transparent and investor-friendly. We’ve found that many investors include energy and precious metals in their portfolio mix, but few have a dedicated exposure to agricultural products, even though these commodities are just as pervasive throughout the economy and in people’s lives as are energy and precious metals.
Andy Hagans: I understand you are specifically bullish on wheat commodities, based on huge and increasing demand. How does the demand look a decade from now?
Sal Gilbertie: As a Sponsor of Exchange Traded Products, we are prohibited from making price projections at any given point in time. That said, speaking on a macroeconomic level, the demand for all agricultural commodities is steadily growing, primarily due to global population growth, which is pegged at around 75 million people per year by the United Nations. The Teucrium WEAT fund is popular with investors, probably because they understand wheat as primary food produce. And also because the Black Sea region is a huge supplier of global wheat supplies. This is an area where the political tensions in Ukraine right now tend to create supply uncertainties. Corn, of course, occupies more acreage than any other single crop in North America, and it is “king” of the agricultural sector. The CORN fund is our largest fund; I think this is because corn gets enormous press exposure, in no small part due to corn’s use as a feedstock for ethanol production in the United States. Our soybean (SOYB) and sugar (CANE) funds are gaining investor support, too; sugar consumption is very steady, and soybean demand shows no signs of slowing, particularly as a feed source for swine and poultry. There is no question that the amount of all of these products needed to supply the demands of our globe 10 years from now will be significantly larger than what is required today. I think the most fascinating statistic I’ve heard quoted is that by 2024, less than ten years from now, a private study showed that the number of soybeans and soybean products needed to simply feed the growing swine herds in China will be equivalent to all of the soybeans currently grown in the world’s top three soybean-producing countries (U.S., Brazil, Argentina) combined.
Andy Hagans: Valuations are important when making allocation decisions. The current Schiller PE Ratio is above 27, which suggests U.S. stocks may be significantly overvalued. And, of course, fixed-income valuations are in nose-bleed territory. Does this strengthen the case for a retail investor to add a commodities allocation to her long-term portfolio?
Sal Gilbertie: I think there is ample evidence showing that an allocation to commodities in a long-term portfolio does potentially decrease volatility and, therefore, may enhance risk-adjusted returns. By using commodity-based Exchange Traded Products, retail investors and advisors can achieve the same exposure to a variety of different asset classes, including commodities, as institutional and professional investors.
Good portfolio theory says that it makes sense to regularly reallocate some of what’s overvalued into something that’s undervalued. Investors and their advisors should assess their overall exposure to individual portfolio components and rebalance as things change in value. Commodities are a valid asset class and are available to every type of investor via ETPs, enabling them to be a prime component in a disciplined asset allocation investment strategy.
Many commodities trade in cyclical patterns, and agricultural commodities, in particular, are especially susceptible to supply uncertainties. Periods of high supply tend to depress prices; conversely, supply disruptions will generally create stable or rising prices because demand for agricultural products is fairly steady. People won’t let themselves or their animals be cold or hungry, which logically translates into obtaining agricultural and energy exposure in one’s portfolio a-la the Peter Lynch method of “trade what you know.” Investors can allocate to commodities when prices are depressed relative to other investments, and they can trim exposure to commodities when they become overvalued relative to other portfolio components. A disciplined approach to investing is what is important.
Andy Hagans: Many retail investors with an allocation to commodities believe that a portion of such allocation should be physical (e.g., gold bullion). Do you agree?
Sal Gilbertie: Gold is perhaps even more popular than oil as a commodity investment in many portfolios. It is used both as a “store of wealth” and as a portfolio diversifier because it is perceived as having a low correlation to securities. Gold, over long periods, is less correlated to the S&P 500 than oil, which may explain why the large gold-based ETPs have many tens of billions of dollars invested in them on any given day. However, most investors don’t know that the big four agricultural products of sugar, soybeans, wheat, and corn are actually less correlated than gold to the S&P 500 over the same long periods. If one were to look at the history of gold trading in the United States, they would see that gold began freely trading over 38 years ago in 1976. Currently, gold is valued at almost twice its historical 38-year average value versus all four of the major agricultural products of corn, soybeans, wheat, and sugar, as measured by the quantity of each that could be purchased with one ounce of gold. It seems to me that a disciplined investor, knowing the increasing macroeconomic demand fundamentals for agricultural products and the uncertainty of supply inherent in agricultural production, would reallocate some of their gold dollars into agricultural products when relative values are as misaligned as they seem to be now. ETPs allow investors to switch among asset classes without difficulty. So a reallocation from gold to agricultural products and back to gold again should simply be part of a disciplined asset allocation strategy as determined by investors and their advisors.