Futures-based exchange traded funds (ETFs) can be difficult to understand. One way to look at their creation is through the development of agriculture futures.
Before the North American futures market originated more than 150 years ago, farmers would grow their crops and then bring them to the market to sell their inventory. However, because the farmers had no indication of demand, their supplies often exceeded what was needed. Conversely, when a given commodity, such as soybeans, was out of season, it became very expensive because of lack of supply, explains Oxford Futures.
Between 1849 and 1850 "to arrive" contracts come into use for future delivery of flour, timothy seed and hay, according to the Chicago Board of Trade. Farmers could bring their commodities and sell them either for immediate delivery (spot trading) or for forward, "to arrive" delivery. The "to arrive" contracts were created to save many farmers from the loss of crops and help stabilize supply and prices in the off-season. These forwards contracts were the blueprints to today’s futures contracts.
Today, ETFs have gotten in on the action. The PowerShares DB Agriculture (DBA) ETF invests in futures on wheat, soybean, corn and sugar. Currently, it’s up 11.7% for the last three months, since it launched in January.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.