Diversification When it Has
Mattered Most Putting Agriculture to Work in Your Portfolio
Jake Hanley, CMT
Managing Director | Sr. Portfolio Specialist March 15, 2024
The S&P 500 Total Return Index is up nearly 10% year-to-date. What’s more, the index is currently trading roughly 10% higher relative to the 200-day moving average. Stocks have been rallying since November last year. The chart shows a very orderly march higher. Yet, experienced investors know that stocks do not always rise in a straight line.
This begs the question, is the stock market overdue for a correction?
On average, the S&P 500 corrects by 10% or more once every 19 months.[1] While the last 10%+ correction occurred only five months ago, at this juncture a pullback of some sort may be healthy. After all the market has already put in 17 new all-time highs in 2024.
It’s during periods of stock market angst that one looks for the strategic benefit of diversification to bear fruit. When stocks are going down, it is nice to have something in the portfolio that may be going up, or at least isn’t going down as much.
Historically that something has been bonds. However, investors with whom we speak are increasingly seeking to allocate to alternative markets. It’s understandable considering there have been extended periods recently when stocks and bonds have declined simultaneously. This includes calendar year 2022 when stocks and bonds were both down double digits on the year.[2]
As investors are exploring alternative markets, it may be in their interest to consider an allocation to agriculture. Agriculture commodity prices historically have exhibited very low correlations to stocks.[3] We observed that those historical low correlations have, in the past, proven to be beneficial during periods of stock market duress.
As you can see in the chart below, the Teucrium Agricultural Fund Index has outperformed the S&P 500 TR index in 7 out of 7 of the previous stock market corrections. Importantly, diversification does not protect against loss. There were periods when the Agricultural Fund Index posted negative returns. However, those losses were less than the negative returns posted by the S&P 500 TR Index.
To be certain, the S&P 500 Total Return Index has handedly outperformed the Teucrium Agricultural Fund Index since inception. However, the relative outperformance during stock market corrections is why we say that a strategic allocation to agriculture has the potential to deliver diversification benefits when it matters most.
ETFs to Consider
Ticker: TAGS & Ticker: TILL
It is not possible to invest directly in an index. However, the Teucrium Agricultural Fund (ticker: TAGS) seeks to provide the daily investment results, net of fees, of the Teucrium Agricultural Fund Index. That index reflects a weighted average of the daily changes in percentage terms of four underly commodity pools, namely the Teucrium Corn Fund (ticker: CORN) the Teucrium Wheat Fund (ticker: WEAT), the Teucrium Soybean Fund (ticker: SOYB) and the Teucrium Sugar Fund (ticker: CANE). TAGS is a fund of funds, and is equal weight CORN, WEAT, SOYB, and CANE. Note that TAGS is registered under the Securities Act of 1933 and as such issues the tax for K-1.
For those looking for a K-1 free option, you might consider ticker: TILL.
The Teucrium Agricultural Strategy No K-1 ETF, ticker: TILL, is similar to TAGS in that it offers exposure to agricultural futures prices in corn, wheat, soybean, and sugar markets. A big difference is that TILL is registered under the Investment Act of 1940 and therefore issues the familiar 1099 tax form. TILL is not a fund of funds, but rather invests directly into agricultural futures contracts in corn, wheat, soybean, and sugar markets. Like TAGS, TILL is rebalanced to maintain roughly equal weight among these four markets.
The Bottom Line
The stock market has had a good run. Who’s to say if/when things might change. However, with history as a guide it is reasonable to expect that the broader equity market indexes will come under pressure sooner rather than later. In fact we may already be seeing signs of that today. Given recent history with both stocks and bonds posting double digit losses in 2022, and given that inflation is proving to be stickier than many had expected, perhaps now is a good time to consider allocating to commodities in general, and agriculture in particular. The Teucrium Agricultural Fund Index has outperformed equities in each of the last 7 stock market corrections of ~10% or more – That’s diversification when it mattered most.
[1] https://money.com/stock-market-correction-chart/
[2] Stocks measured by the SPX Index (-19.44%) and Bonds measured by the Bloomberg Global Aggregate Treasuries Total Return Index (-17.47%). Period measured 12/31/2021 through 12/30/2022. Source: Bloomberg Finance L.P.
[3] See page #24 in our 2024 Outlook, The Prosperity Paradox, available here: https://www.teucrium.com/news-insights/385