2012′s Best Performing Commodity ETF

2012 has been a relatively volatile year. After starting things off on a strong note, markets began to push and pull in either direction, and commodities have been no exception. Picking the right commodity investment for the year has been a tall order, as very few have been consistent. But now that we are more than halfway through the year, some have begun to pull away from the pack, and so too have the ETFs that track them [for more commodity news subscribe to our free newsletter].

Thus far in the year, the best performing commodity ETF is the DJ-UBS Grains Total Return Sub-Index ETN (JJG), which has jumped by more than 35%, though most of those gains have come in the last few weeks as the fund had little momentum in the beginning of the year. JJG’s gains can be attributed to the recent drought that has plagued much of the US. But while the drought has been widely covered, few realize just how severe it has been. For starters, the trailing 12 months have been the hottest on record for the U.S. since records have been kept (dating back to 1895). Combine that with the lack of rain in the past few months and you have the worst drought seen in nearly 70 years, putting a major pinch on the prices of a number popular commodities.

Under The Hood of JJG

This futures-based fund invests in contracts for three different commodities: soybeans, corn, and wheat. Coincidentally, those are three of the best performing commodities for the year, as the drought has caused shortages and price spikes. Currently, JJG has more than $180 million in assets and trades roughly 150,000 times each day. The fund charges an annual fee of 0.75% [see also Four Commodities To Buy Before Roubini’s “Perfect Storm”].

Concerning the impact of the drought, Congress is currently weighing the effects of passing another farm bill that would fund those who have been hit hardest by the drought. A similar bill in 2008 provided $50 million to farmers all across the country whose crop yields were destroyed due to adverse weather conditions. According to a U.S. drought monitor, the majority of the country is abnormally dry with a number of regions falling under the  worst category of “exceptional” drought .

JJG may offer a compelling investment as those looking to call the top could benefit from a short position while those looking to ride out the trend can utilize this fund in a more traditional manner. Either way, the rise of the grains was swift to develop, so an opposite action would probably be the same, trade accordingly [see also Invest Like Jim Rogers With These Three Agriculture Stocks].

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Disclosure: No positions at time of writing.