As we head into 2023 with at least a semblance of a road map as to the Fed's rate plans and overall economic picture, I've been trying to pick a low maintenance trade that won't get batted about as we grind our way through 2023.
But before I get into to the fund and why I'm betting on it for 2023, let's look at key market and economic influencers going into the the new year, for some context.
The furious pace of rate hikes has slowed. The Fed has signaled it's pushing its terminal rate forecast over the 4% border to something in the low 5% range -- a terminal rate that could extend through the year. While we're not supposed to fight the Fed, the Fed Funds Futures are telling a slightly different story, with rates seeming to peak mid-year and backing a quarter of a percentage point by the end of the year. The old adage of "the market is always right" also comes to mind.
My bet is we have our capitulation moment early in the first quarter and then spend the balance essentially rangebound, perhaps through at least the third quarter. I say rangebound, because a few economic data points, with their year-over-year comparisons, are gong to look like they are starting to recover, but we'll be trying to square these improvements with some tough earnings numbers, hence the give and take.
Wheat had a wild first half in 2022, because of the Russian invasion of Ukraine. But it wasn't the only soft commodity that performed. Looking to the year-to-date returns for some of Teucrium's funds, the Teucrium Corn Fund (CORN) and the Teucrium Soybean Fund (SOYB) both returned slightly over 22% year-to-date through Dec. 21. Other softs, like coffee fell almost 21% based on the ICE Coffee C Future.
The issuer recently teamed up with Singapore based AiLA Indices who bills itself as "a leading provider of alternative alpha strategies in the Commodities and ESG sector" to launch the Teucrium AiLA Long-Short Agriculture Strategy ETF. From reviewing the company's website, AiLA is a machine-learning enhanced quantitative investment platform.
The fund bills itself as a passive product, because it tracks an index but from my understanding of AiLA's process it could be considered to be active. The index's information page is interesting, but clearly geared to a more institutional audience. While it was difficult to find a methodology specific to the index underlying OAIA, the fund prospectus and the accompanying whitepaper provides some good detail about the overall approach. Essentially, the index takes commodity specific items, like the shape of the futures curve, recent trading activity and open interest in a particular commodity or contract and pairs them with higher level macroeconomic signals like foreign exchange rates, inflation trends, GDP trends, and historical correlation trends with other commodities and asset classes. It takes all this information and produces daily signals on each of the index constituent positions.
Parameters for the final index include a 10% volatility target, a Sharpe Ratio of 1.0, and daily checks that overall position weights are 100%, meaning there is no leverage employed in the portfolio.
Wrap It Up
The fund has a 149-basis point expense ratio, equating to $14.90 per year in expenses for every $1,000 invested. But this is a quantitative, systematic, daily-signal based product. It takes an approach I think will do well in the coming year. I expect some mean reversion for some softs as well as some weather and continued transportation issues for others. Essentially, patterns that are made for machine learning. There you have it. My pick for 2023: The Teucrium AiLA Long-Short Agriculture Strategy ETF. Interestingly, the prospectus also indicates a base metals version of this strategy in the works, so I'll keep an eye out for that once it gets launched.