Inside The Agriculture ETF Revolution, With Sal Gilbertie

Financial advisors and investors probably take most commodity ETFs for granted today, but the truth is that many of these ETFs were revolutionary when they first launched.

Sal Gilbertie, founder and CEO at Teucrium, joins the show to discuss Teucrium’s origin story, plus how the company continues to be an innovator in the ETF space in the present day.

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Episode Highlights

  • How Sal got started in the ETF space, including the origins of Teucrium’s very first funds.
  • Sal’s insights on how the ETF landscape has changed in the past decade plus.
  • The differences between ETFs, ETPs, and ETNs (and why ETPs are generally colloquially referred to by the media as ETFs).
  • Insights on Teucrium’s original ETFs, including CORN, WEAT, SOYB, CANE, and TAGS.
  • The fascinating strategy behind OAIA, the Teucrium AiLA Long-Short Agriculture Strategy ETF.

Today’s Guest: Sal Gilbertie, Teucrium

About The Alternative Investment Podcast

The Alternative Investment Podcast is a leading voice in the alternatives industry, covering private equity, venture capital, and real estate. Host Andy Hagans interviews asset managers, family offices, and industry thought leaders, as they discuss the most effective strategies to grow generational wealth.

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Show Transcript

Andy: Welcome to “The Alternative Investment Podcast”. I am your host, Andy Hagans. And today, we’re talking about commodity ETFs, agricultural ETFs, the whole backstory of how this space got revolutionized, decades ago now. Very excited to announce that joining me is Sal Gilbertie, who is founder and CEO of Teucrium. Sal, welcome to the show.

Sal: Great to be here, Andy. Thank you for having me.

Andy: Yeah, and we were talking a little bit before we started recording, you know, many years ago, over a decade ago, I remember starting at ETF Database, the company that I co-founded with Michael Johnston and Jimmy Atkinson. And we got to kind of, you know… We weren’t there at the very beginning of ETFs or anything, but that feels like it was the Wild West, I guess, in this space, like, 2008, 2009, 2010. Everything was so different then, right?

Sal: It was different. And we actually started in 2009, and so, I guess we started kind of together in the business. It’s interesting.

Andy: I remember some of these fun launches, and I remember my impression even then was, like, wow, these guys have some good tickers. These are, like, really memorable, kind of catchy tickers. So, just to kick things off, could you tell us a little bit about yourself and your background, Sal?

Sal: Sure. I come from a farming background, a farming family. I’m actually sitting on a farm right now. That’s where I keep my office. But it’s an herb farm. And I focus on row crops. Right outta school, I went to Cargill. So, I started my career at Cargill, and actually, in their energy division, trading, believe it or not, leaded gasoline. I go way back. And I brought them from leaded to unleaded, traded energy there, and, you know, cut my teeth in basically ags and energy.

Fast-forward all the way to 2008. I was sitting at, at a division of SocGen, and I had started the ethanol market, the ethanol over-the-counter market. I heard George Bush give a speech, George Bush Jr., about ethanol, and I realized, “wow.” I started in leaded gasoline, and lead, you know, makes you stupid, and we switched to MTBE, which gives you cancer. And I’m thinking, wow, they’re gonna put ethanol, which is nothing but vodka, it’s grain alcohol, into gasoline. That’s the future. And so I started a desk inside of SocGen and that ended up trading about 30 different commodities, with ethanol swaps as the lead, which was really fun and interesting. And then I got into ETFs by happenstance.

Someone called me from downstairs, I was in Rockefeller Center, in my office in New York City, and said, “There’s a guy in my office starting this thing called an ETF, and there’s gonna be oil in it. And I don’t know what he’s talking about, but I want his account.” It was a broker. So I went downstairs, and it was a guy starting an oil ETF. And I didn’t know what an ETF was. And through my entire career, at Cargill, and Merrill Lynch, at Bear Stearns, I was not allowed to trade futures in my personal account. I traded for the house, but I couldn’t trade futures in my personal account, because it was a conflict of interest.

Now, here, this guy was telling me he was gonna package oil futures in something traded on the New York Stock Exchange. I thought that was the best idea I’d ever heard. I thought I could make a better product. I thought that the structure of just owning the front month and rolling it was inadequate. And I couldn’t believe there were no agricultural ETFs at the time, or single-commodity agricultural ETFs. So I started Teucrium, and I left my job there, and started Teucrium. And you speak about the tickers. I remember going down to the New York Stock Exchange and saying, “I need some tickers.” And they said, well, you know, I said, “I wish you had more than the three letters,” and…

Andy: When you say you went down to the New York Stock Exchange, is this, like, there’s a secretary sitting at a desk? It’s like…

Sal: No. I made an appointment, and I forget who networked me, maybe whoever our distributor was.

Andy: “I need the ticker department.” Give me the…

Sal: Yeah. And I went down and I sat in there. You know, it’s a nice place down there. And they, I said, “I wish that you had more than three letters for tickers.” And he said, “Well, we just actually merged the ticker system with NASDAQ. We have four.” I said, “Wow. I’m starting a corn ETF. Do you have CORN?” And I remember, he went down to and came back and said, “Yeah, I have CORN.” And while he was there, I was sitting waiting. And I’m making up as I go. So, “Well, we’re gonna have a soybean ETF. Do you have the S-O-Y-B?” He went back, and we got all the tickers we wanted. And that’s how we got really good tickers. We couldn’t get SUGAR because of Sugarland, Texas. There were so many companies that were started, based around Sugarland, Texas in the Houston area, that people had taken those tickers. So we have CANE for our sugar funds.

Andy: Yeah. I mean, CANE is a great, I mean, that’s one of your best ticker, I’d say. That’s not a second-rate ticker. That’s a great one.

Sal: I’ll admit that wasn’t my primary choice, but we got it.

Andy: I’m trying to think, you know, and by the way, so, this episode, this is all part of our series on liquid alts and alternative ETFs. And, Sal, I’m just really excited to talk with you, because we’re gonna talk about the current-day, you know, current market landscape with liquid alts, alternative ETFs, but this is also kind of a little trip down memory lane. And I’m trying to think back in those days how many tickers were, I hope you don’t take offense to this, but how many tickers were, like, cute? You know, were kind of, like, catchy. Seems like it weren’t too many. Maybe there were, like, a few, but now, with ETF launches, it seems like everybody wants, like, kind of a cute, catchy ticker, right?

Sal: Well, you know, we’ve learned the secret to the business. And we weren’t trying for cute. We were just trying for practical. Like, I wanted CORN to mean corn. And that’s what we got. Which, I have to be careful speaking about the corn markets, because now, the SEC, since we sell, you know, a listed product on the exchange, we’re heavily regulated. And when I talk about the corn markets, they now assume I’m talking about my ETF as well. So I have to kind of be really balanced in my, if people ask me about market projections or things like that, which is interesting. But we found the secret.

Andy: So, if you just say “corn,” it’s like, no one knows, technically, are you talking about corn the crop, or CORN your ETF?

Sal: Correct. And the SEC understands that. You know, they’re pretty smart over there. So, the interesting thing that we found is the secret to… You have to have a good product, okay? But you’ve gotta be first to market, and a good ticker really helps. So, if you want success in the ETF industry, you know, get something good to put inside an ETF, be first in that sector, and get a good ticker. That’s the secret.

Andy: And I might add, have a reasonable expense ratio, because if there’s too much juice left to squeeze, there’s always, you know, the likelihood somebody else is gonna come in. But a lot of times, the first to market, they gain all the AUM, and then now they have that liquidity advantage, right? Because there’s…

Sal: That’s correct. That’s correct.

Andy: So, yeah. I like…

Sal: But expense ratios, remember, you know, while ETFs are still the cheapest thing around, a lot of people will compare expense ratios to, say, mutual funds, or they compare alternative ETFs, like ours, which have higher expense ratios than, say, plain vanilla ETFs that are, you know, S&P 500 ETFs, that are single-digit bips, because there’s massive amounts of money in them, and they’re kind of not differentiated. Whereas, when you’ve got a lot of work with a futures-based ETF, which is what ours are, with special structures that they’re in, that create the ETF wrapper, or ETF-like wrapper… We call them an “ETF.” Technically, they’re an ETP, an exchange-traded product, but for simplicity, we’ll say “ETF.” These things are difficult to manage. They’re expensive to manage. And so, you know, nine bips doesn’t cut it. The expense ratio is a lot higher than that in some of these specialty products, but you get what you pay for. And our products are unique, and provide people, we think, effective access for what they want. We can get into that, wherever you wanna go.

Andy: So, yeah, let me get technical for a minute. And even back in my ETF Database days, I was not the technical guy, so maybe this is a dumb question. I understand ETP, this is, like, the umbrella term that covers all these exchange-traded products, including ETFs. And then, we had Daniil Shapiro on the show. I kind of asked him about ETNs, you know, and I understand those are a little less popular now, exchange-traded notes. So, those are a form of ETP. So, is there another kind of ETP besides ETFs and ETNs?

Sal: Yeah. There’s what we have. They’re two kinds of funds. A ’40 Act fund, which is what most people are used to, in a mutual fund or a plain vanilla ETF. And then there are ’33 Act funds. There are very specific rules about diversification and holdings and things like that, that go into a ’40 Act fund. So, you’ve gotta be in a ’33 Act, which is a limited partnership. Ours are structured as a Delaware. Some are limited partnerships. We’re in a Delaware series trust. So, some ETPs. But either way, technically, it’s not an ETF, but when we’re speaking, when the press speaks, they call just about everything and ETF. The main.

Andy: Colloquially. Colloquially, they…

Sal: Yeah. The main distinctions between an ETF or ETP, which generally you call an ETF, okay, or an ETN. An exchange-traded note is a debt instrument. It’s completely different. ETFs are structured as, like I say, a trust, an LLP. They are their own legal entity. So, I can get hit by a bus tomorrow. Everybody at Teucrium can go down in a plane. We’re not allowed on the same plane, but it can happen, and the investors in our funds are not affected by that, because your money’s in a separate trust. It’s in its own entity. It lives there. If you buy a bank note, an exchange-traded note, and that bank blows up, you lose your money. You are now a creditor, an unsecured creditor, to the bank. And ETNs, I would add, they charge you a fee. So you’re actually paying the bank to take your money.

Andy: Yep. So, an ETN, and I asked Daniil about this… With ETNs, I asked him, you know, colloquially, do you fold those in with ETFs? And he said, well, at Cerulli, definitely not. We consider them to be very, a dissimilar wrapper. I mean, similar in some ways, but they’re their own thing.

Sal: That’s correct.

Andy: With ETPs, like with a Teucrium-type ETP, we’re gonna fold it in, and we’re gonna call it an ETF. Colloquially, that’s what the media does. And for all intents and purposes, from the investor, from the RIA, from the advisor point of view, they’re behaving roughly the same. And I gotta say, once you go down that rabbit hole of the real technical details of ETFs and ETPs, it just makes me go, “This is all, like, way too complicated for me. I’m going back to my 40,000 feet view.”

Sal: All an investor needs to know is that they’ll be different tax structures. So, you might get a, you know, a K-1 if you buy a certain fund, like many of our funds. You might get a 1099. Some people don’t mind K-1s. They’re not intimidated, and they understand that the tax treatment is better if you’re in a certain category. And most of your listeners probably understand that very well. They don’t care if they get a K-1.

Andy: Right. So, that’s like an MLP, master limited partnership, or just a lot of these other wrappers. They’re just a little bit different than a normal ETN.

Sal: That’s what it is. But by and large, they give you exposure to a sector. They go up when the sector goes up, they go down when the sector goes down, or they do their own thing if they’re an alpha product, and the investor gets hopefully what they want. Just know your product before you buy it.

Andy: That’s understood. Okay. So, you know, Sal, you did a great job giving us the backstory of up to the Teucrium launch, and how, you know, you got your start there. But I’m wondering what were the first couple of years like? You know, when you launched your first ETFs, did they have any trouble attracting assets, or, because you were first to market, were they, you know, like, a success right from the start?

Sal: They were not a success from the start. It’s a difficult business to be in. If you have futures-based products like ours, you’re not listed on all the platforms. So, all the eBrokers have you immediately. You know, you get your ticker, you spend your year putting everything together. You spend your money. And you go down and ring the New York Stock Exchange bell, and you do your interview on CNBC, and everybody’s happy. And, you know, people at Merrill Lynch and UBS and other big wirehouses call up and [inaudible 00:12:10] try to buy you and they can’t, because it’s not on their platform yet. That’s a multi-week, multi-month, multi-year, in some cases, process to get onto their platform. Whereas if you’ve got an E-Trade account, or you’re an RIA that clears through Schwab or another, you can just buy it and sell it instantly.

So, one of the things that happens is getting distribution, and getting onto people’s platforms is very difficult. The other thing is, unless you’re a known name, which Teucrium was not at the time, nobody cares. They wanna see a track record. They wanna check certain boxes that may or may not be relevant. And until you get in a headline, and our business has always been a headline business, it, you know, you do your work, and you grind your assets. So, you grind into slow, steady growth, and that’s your success until a headline happens. And I think it was our…

Andy: So, I read in between the lines, I guess. So, I’m thinking you’re on the online brokerage platforms right away, but then some of these other, you know, big companies, you’re not gonna be on that platform right away. You might not for a very long time. Is it a matter of business development and building relationships to get on their platforms? Or, is it a matter of, like, this commodity just spiked, and there’s a lot of investor demand for this ETF, so they’re hearing it from, like, their clients?

Sal: It’s both. And in fact, many of the platforms will say, all right, you’ve gotta have, I’m just making this up, but they’re unique, but, you’ve gotta have $50 million AUM, you’ve gotta have a year under your belt. You’ve gotta have at least 100,000 shares trading a day. None of that’s relevant in an ETF. Okay? ETFs are liquid. They could trade nothing, every day. But if your underlying is liquid, somebody can put a giant order in and they’re gonna get executed, with a good fill, because ETFs, the ETF mechanism, the create-redeem mechanism, the arbitrage mechanism… ETFs, it doesn’t matter what the historical volume of the ETF is.

Andy: So, the liquidity is not just related to the bid-ask spread of the fund? It’s just as related to how liquid the underlying assets are?

Sal: Completely dependent on the underlying. Absolutely. So, that’s the most important thing. So, you know, people can look at an ETF. If it has low volume, that doesn’t mean anything. What you need to do is look through the ETF. What does it hold? We’re in the ag markets, okay. Corn, soybeans, wheat, they trade decabillions a day, of notional value. There’s nobody that could put in an order…

Andy: What’s a decabillion? That’s 10 billion?

Sal: Yeah. Yeah.

Andy: Okay. Yeah.

Sal: So, you know, on an agricultural report day, each one of those commodities will trade more than $10 billion notional value, in the underlying futures markets that our funds hold. So, you know, an investor could say, well, I’m really big, and I’m gonna throw, you know, $10 million into your fund, or $50 million into your fund. How much is it gonna move? It’s not gonna move at all. It’s not gonna move at all. It’s gonna be fractional, if you know enough to execute that trade during market hours of the futures that it holds. So, that goes for any ETF, and we could have a whole show on liquidity if you want it, but there are people better versed than I, but people should never use a market order, because everything is priced by a machine, and a market order is an attack order. And if there’s a glitch in a machine, you’re gonna get a terrible fill. Always use a limit order.

Andy: Always use a limit. Yep. That’s, like, rule number one. Yeah.

Sal: Rule number one. And machines will just recalculate. So, if somebody comes in and says, I wanna buy, you know, $5 million of your CORN fund, if they do it while the corn futures are open, and the corn futures are trading, you know, $5 billion that day, your $5 million doesn’t mean anything. It really doesn’t. And you’re gonna get a good fill.

Andy: Yep, absolutely. Okay.

Sal: Market-based fill.

Andy: Right. So, you’ve taken us back to the beginning. I mean, I love startups, right? So, for me, this is cool because, you know, again, we kind of had, I guess, a front-row seat, in a way, with back when we were covering the ETF beat at.

Sal: I remember those days well, with you.

Andy: Yeah. Broadly speaking, within commodity ETFs, alternative ETFs, liquid alts, aside from everything, what has changed in the ETF landscape in those, you know, 13, 14 years?

Sal: Well, I think when we came into the game, we became what we call second-generation funds. So, the first-generation funds, those that hold futures like we do, they bought the front month future and rolled. And, you know, that’s fine if you’re holding for a short period of time, meaning couple weeks or less. But if you’re gonna hold a long time, you now have roll costs that are involved with the futures. It gets complicated. So, what we did was we designed funds that held more than one future. Most of our funds hold second month, third month, and then an anchor month.

So, for instance, in CORN, we don’t hold spot month corn. First off, you don’t want to, because it’s very limited. It turns into the physical. And that’s not our job. Our job is simply to give the investor price exposure to corn, in this case. And so, we hold second month, third month, and then the December-following third month, which means sometimes you own two Decembers. Well, guess what? Most farmers are hedging their corn in the December contract. So, you’re out there with the farmer, you’re out there with the professionals, you’re out the curve. The only people playing far out the curve are the pros. If you’re gonna buy a fund because you just say you want exposure to corn for whatever reason, okay? If you wanna buy the corn fund, where do you want your money to be? Do you want it to be in the front, subject to the whims of everything, including, you know, speculators, headlines, all kinds of things? Or do you say, I want my portfolio to be exposed to corn for diversification purposes, maybe for some alpha purposes, if I got in, you know, when corn is trading flatline, at its breakeven, which agriculture often does? There are a lot of different reasons.

You want your money to be more stable, in contracts that are not so much less volatile, but that are not subject just to the daily headlines. They’re subject to the professionals. You trade out 12 months or 18 months, only pros are trading out that far. That’s where you want your money to be with that. So that’s what we designed. And so, our funds were, like, second-generation funds at the time, and that’s where we really did make an impact, not only because we provided a whole sector, meaning agriculture, that wasn’t available to people before, unless you traded a futures account. But we also structured them differently, to have less of the inefficiencies that the first-generation futures funds did.

Andy: And, I mean, as an investor, I’m a perfect example of that, because, you know, I never traded futures, but when commodity ETFs were available, it was sort of like, this an easy, frankly, just easy… Right? Isn’t it often about ease of use, whether you’re an advisor, an individual investor? Now it’s easy for me to include some liquid alternatives, some commodity ETFs, in my portfolio.

Sal: That was my light bulb moment, when I found out what an ETF was, and I could put something complicated into a wrapper that made it simple for an investor. They’re not necessarily simple products, but it makes it simple for an investor. Hey, it’s in my account. I know my margin rule’s 50%. I’m, the same rules as if I bought IBM, or General Electric, or Tesla. You know, it’s the same trading rules in my account. It’s liquid. I can buy and sell it every day. I can have price discovery during the day. It’s not like a mutual fund, where I put my buy or sell order in and wait for the price. It checks all these wonderful boxes, and, you know, they’re inexpensive, given the products and what they do.

Andy: Absolutely. Okay. So, what I’d like to do, I have a list, not quite all, but a list of ETFs that I wanna ask you about. And, you know, I know that, you know, the thesis, I guess the investment thesis in commodity ETFs and agricultural ETFs, it might be kind of similar, but there’s also some unique aspects of these different commodity markets. Or there might be something going on in an individual commodity market that traders or investors might wanna know about. So, I kind of wanna go through ’em quickly, just one by one, and get your thoughts. So, why don’t we start with CORN? C-O-R-N, that’s the ticker. This is the Teucrium Corn ETF. Anything unique that investors or traders should know about CORN?

Sal: Sure. So, first off, it’s a long-only fund. So, if you think corn’s going up, the fund is supposed to go up, and does, when the futures it holds goes up, and it will go down when the futures it hold goes down, less your fees and expenses. So, you know, that’s your exposure. You need to be okay with exposure to corn. Corn markets are very unique, in that corn is king. It is the king of ags. And there’s a reason why they made a movie called “King Corn.” It’s really important, that…it’s throughout the whole economy. So, you know, we always say to people, the last thing anyone will do is let themselves, their families, or their animals be cold or hungry. So, you know, why don’t you have energy and food in your portfolio? At least somewhere?

And it’s easy to get energy. We say to people, “What commodities do you hold?” Lots of people hold gold and oil. And we say, “Okay, you can’t eat gold. You need gold to get oil and need gold to get food, and where’s your food?” “Oh, well, you know…” Tell us about it. So, that’s where our products come in. So, we give people exposure to these really critical products. Demand for ags keeps going up with the population, and with uses for ag. So, remember, not only are more people in the world, which means more food, okay? But now we make ethanol out of corn. Ethanol comes from corn and sugar. And so, when ethanol came to be, now you need more corn for ethanol. Well, somebody said corn is in, you know, almost 10,000 of the average 40,000 products that are in a grocery store. So, corn’s everywhere. There’s no way for you to escape it. And it doesn’t matter what the latest iPhone is, what the political landscape is. Nothing matters in terms of usage of corn. All right? Now, usage of wheat is even more inelastic, because wheat is just consumed by humans. It’s very rarely…

Andy: Well, yeah. And Sal, that’s my next ticker on the list. So, I wanna ask about wheat. So, this is…

Sal: Yeah. So, we just…we’ll just. But let me go back. There’s something called the golden grain cycle. Okay? So, agriculture, because it’s so important, is subsidized by every government in the world. Every farmer in the world somehow has access to a subsidy program. Which means supply is encouraged, which means when the weather cooperates, there’s always enough, and there’s actually always plenty. There’s more than enough. We’ll call it plenty. Grains often trade at their breakeven price, for long periods of time. And people can go on our website and see, or google the “golden grain cycle,” and part of our things will come up, our publications will come up. Bottom line, is every five to seven years, statistically, there’s a disruption in supply, usually because of weather. So, for five to seven years…and we had an eight-year period…

Andy: That almost sounds biblical, Sal. Like, every seven years there’s a famine, you know?

Sal: Yeah. Okay. So, we say it all the time. Fire, flood, famine, those are not just things that happen in the Bible. They happen to farmers and your food. And so, when you see grains are flatlined, they’re not really doing anything, they’ll generally be at a low historical price… For corn, prior to the last two years, the COVID and inflation that came, corn’s futures equivalent breakeven was about $3.50 a bushel. Okay. Flatlined there, for many years. And you can look at charts. Go to our website, look at the charts. But the moment there’s a weather disruption… People don’t stop eating their bagel in New York City if it doesn’t rain in Kansas, where they grow wheat. Okay? That’s the easiest way to say it. So, demand is inelastic. And supply can be elastic. And so, if supply goes down and demand stays steady, it does not take a rocket science to see what happens.

Andy: Yeah. And math isn’t my strongest suit, but I think I can solve that economics riddle right there, so…

Sal: That’s where people layer these commodities into their portfolio. And we’ve had many people call us and say, “Wow. I heard you speak, and I put 1% of my portfolio in CORN, and I had to wait three years and pay you your fees, but holy cow. It went up, you know, when we had a problem.” And so…

Andy: And Sal, that’s really the whole point of alternatives. I mean, I think including liquid alts in a portfolio, or any kind of alts, a lot of people, of course, they want to generate alpha, but also non-correlated assets, negative correlated assets, just that, you know, kind of downside protection, or black swan event, or, you know, all those things that you’ve alluded to.

Sal: Sure. Well, you know Jake Hanley, our lead analyst. I mean, he always says, these are products that are designed… You want products in your portfolio that zig when the stock market zags, basically. That’s what you’re talking about. And, yes, in fact, four of the last five corrections of the S&P 500, okay, with 10% or more pull-back from the highs, the agricultural index, either the S&P Grains Index or the Teucrium agricultural index, which is behind our TAGS fund, they outperform the S&P 500, sometimes very significant. So, often, they all go down. You know, S&P goes down 20%, grains go down too. Okay? But far less. And people can go to our website. All this is there and publicly available. But it’s really important to understand that grains… We’ve had many days when the S&P is down and our funds are the only green on the screen, and, you know, it’s just nice to see.

Andy: That’s awesome. Well, okay. On that note, I wanna move on to the next ETF here. So, this one is WEAT, W-E-A-T, the Teucrium Wheat ETF. You know, you already mentioned that the demand for wheat is very inelastic. I mean, my wife and I, we make homemade bread three times a week, so I guess I’m part of the problem. Has the whole anti-gluten movement, you know, has that really put a dent in this ETF?

Sal: You know, people ask us about that. They ask us about anti-gluten, they ask us about sugar-free and all that. These markets are so gigantic, okay? And you’ve gotta think globally. Where our first-world, high-class, “I’m worried about my gluten intake, and I wanna go sugar-free,” that’s really important to us, okay? There are 8 billion people on the world, and most of them could not give a hoot about those things. They just want…

Andy: Yeah. And whatever percent of them, much larger than we’d like, are dealing with food insecurity, and that’s a matter of, a lot of times, of basic nutrition, basic grains. So, between, like, CORN and WEAT, I guess, even these first two, are these mostly… I guess, do you have data? Is this investors? Is this traders? Is this both? Who’s owning these ETFs, or…?

Sal: Well, here’s the interesting part about ETFs. We’re not a mutual fund. So we have no idea who’s buying us. We sell the shares, actually. We don’t make markets in the shares. Market makers do. Okay? And authorized participants are people that we have a contractual relationship with. And this is for all ETFs. This is how the ETF business works, okay? So, market makers buy and sell on the stock exchange, depending on investor demand. Okay? And if they sold a great number of shares, they’re exempt from the short-selling rule, so they can sell short and not be covered. Okay? They could sell short and be exposed for, I think it’s five days, without having to do anything about it.

So, what they do, on the market, when a lot of demand comes in for one of our funds, or any other ETF, they sell those shares. And when they’re short enough of ’em, they come to us and do what’s called a create. And we do creation baskets, which vary between 12,500 shares and 25,000 shares a basket, and an authorized purchaser will do that. Vice versa, we can take those baskets back, take the shares back off the market. So, that’s the ETF mechanism. That’s why it works so well. That’s why it doesn’t matter what the volume of an ETF is. It can be zero, zero, zero, and you wanna buy a million shares. Buy ’em. Do it when the underlying market’s open, you get your million shares at a good price.

Andy: So, the ETF market has that kind of built-in safety valve, or multiple layers of liquidity, better way to put it.

Sal: Correct. Correct. A lot of people checking the old-fashioned boxes, thinking about mutual funds, or stocks. Those are irrelevant when it comes to ETFs. What’s relevant to an ETF is what does it hold? Where is that market traded? And the market maker who’s making markets in the ETF trades those underlying markets, and creates the shares that you need, instantly. Machines do it. It’s really fast, it happens seamlessly, and it happens efficiently in deep markets, and that’s why we chose these markets. I didn’t wanna be in illiquid markets.

Andy: Understood. Okay. What about SOYB, S-O-Y-B, the Teucrium Soybean ETF? Anything unique going on in the soybean market that investors should be aware of right now?

Sal: Sure. Soybeans are the unwanted stepchild. So, they share acres with corn. They’re really important. And nobody talks about ’em. And, you know, CORN, when we first launched, going back to your original question, took two years. In our second year of CORN being launched, there was a drought, and a lot of money came into CORN, and that made our CORN fund. In 2014, Russia invaded Crimea, and our WEAT fund, which had sat at $3 million, for three and a half years, literally doing nothing, went to almost $50 million in a course of a few months, because wheat was in the headlines.

And when Russia invaded Ukraine in February, our WEAT fund, I think, went from $80 million to well over a half a billion in a matter of weeks. Headlines matter. And soybeans are never in the headlines. They were during the trade war, when Donald Trump was having a dispute with China. So, when President Trump put in the tariffs, we had some interest, and that grew our soybean fund. But soybeans, the fund is never as active or never as big as I think it should be. It’s still a nice fund, a good fund. Bloomberg reporters do a great job in saying that it’s one of the better futures ETFs out there in terms of whatever metrics they look at. That just happens to be the way it worked out. It’s nothing that we’ve done other than the original design. That’s just the way soybeans trade.

Andy: Understood. Okay. Well, that brings me to CANE. And this is one of my favorite tickers. This is the Teucrium Sugar ETF. I mean, well, I gotta say, you have the data, so let me theorize. I would theorize that this is another area of relatively inelastic demand, right?

Sal: That’s true. And sugar, you know, people are always asking, what about sugar-free? Well, remember, sugar’s kind of like corn. Sugar has two uses. It gets fed to humans. Humans consume it in a variety of ways, directly and indirectly, and it makes ethanol. And in fact, it’s the most efficient way to make ethanol. In corn, there was the whole food-for-fuel debate, when corn was first used for ethanol. And you’ll notice that went away quickly, if you remember. The reason for that is, the only thing you need from the corn to make ethanol is the starch. So, you pull the starch out of the corn because you’re gonna turn that into a sugar, and then turn that into ethanol, so there’s an extra step. Okay?

But what’s left is the fiber, the protein, and the oil. So it’s still an animal feed. It’s still useful for all kinds of other byproducts that get consumed directly or indirectly by animals and humans. So, more corn being planted for ethanol actually increased the food supply. There was no food-for-fuel debate there. With sugar, there’s just enough sugar to produce both, and it’s a simpler process. So, yeah, the demand stays pretty firm there. And it’s kind of a backwards market, whereas the corn, soybean, and wheat ETFs focus on front-month, second-month futures, and then either a November or December future. Sugar focuses on March as its anchor month. Because it’s basically grown in Brazil, India, and Indonesia, so it’s kind of a reverse market there.

Andy: Okay. So, we’ve covered these individual commodity ETFs. Now, there’s a couple more that might be a little more interesting to some investors. Next on my list, I have TAGS, T-A-G-S. This is the Teucrium Agricultural ETF. So, what’s unique about this ETF? Why might this ETF be appealing for an investor to include in their portfolio?

Sal: The most common question we get from investors is, “Wow. You’ve convinced me. I do need an exposure to ags in my portfolio,” for whatever reason that they come up with, diversification, or alts, or just alpha. But, which one do I pick? And a lot of people, they just want the exposure. So, TAGS actually is a fund of funds. It buys 25% equal weighting of the four funds we’ve just spoken about. Okay? So, it buys 25% of our corn fund, our soybean fund, our wheat fund, and our sugar fund. It’s the old DBA. In essence, it’s the DBA that you may remember when you first started in the business, that was just 25% of the big four. And so, that’s what TAGS does. Then there’s TILL. I’ll hit…I don’t know if you mentioned it or not, but that’s probably next on.

Andy: Yeah, I was getting to that one next. So, let me ask about TILL, because, I gotta say… This is the Teucrium Agricultural Strategy No K-1 ETF, and we were talking about catchy tickers. This has to be, like, the catchiest ETF name I’ve ever heard. Just having, like, no K-1 in the ETF name, that’s, like, a power phrase. I’m like, “Oh, that just caught my attention right away.” I’m like, “I gotta ask Sal about this one.”

Sal: Yeah. Here’s the issue. So, the first five funds we’ve spoken about all, our ’33 Act funds, they issue a K-1. So, what happens is, a lot of people check the “no K-1” box in their TAMP program. So, you know, their asset management program, where there’s just money going in weekly, into an investment. A lot of people don’t want a K-1.

Andy: And if I’m a W-2 employee, and I’m not an entrepreneur, and I’m not high-net-worth, I’m not a family office, I’m not invested in private equity stuff, I have to say, you know, I wouldn’t want a K-1. It’s just kinda like, once you get 10 already, what do I care if I get the 11th or 12th? But if I got zero, I wouldn’t want the first, I think.

Sal: Okay. So, that’s a valid point, kind of. So, the one is, okay, that’s valid. You don’t want a K-1? You don’t want a K-1. And a K-1 from an ETF is completely different than, you know, your father’s K-1 from his dry cleaning business. Right?

Andy: Fair. That’s fair. Yeah.

Sal: That comes in September, and is an inch thick, okay? And he’s gotta file a delay on his taxes. The K-1s that ETFs, they’re all issued by the same company. PricewaterhouseCoopers has a lock on it. They’re the only people that do it. They’re issued by Valentine’s Day. If you actually printed it out, and don’t, they’re about as big as a postcard, and they have two or three pieces of information on ’em. And there’s a giant 800 number on the bottom. If you have a question, you call the 800 number and they walk you through. It’s not a problem, really, to get a K-1 from an ETF. It’s completely different than getting a K-1 from a business.

Andy: But I guess it caught my attention anyway, right? It caught my attention, and I’m even…

Sal: Okay. But a lot of people don’t even wanna deal with that. If you’re doing your tax returns on TurboTax, you gotta spend a couple extra minutes on the K-1. It may not be multiple pages and a problem. It may just be a little item that you enter in, but it’s an extra step. People don’t want that, for whatever reason. We have investor demand, as you could see, TILL leapfrogged over TAGS in terms of popularity, in terms of the amount of AUM in it, because investors just need that. So, it’s also slightly different. It’s not a fund to funds, like TAGS. It still only owns 25% each of corn, soybeans, wheat, and sugar. But it just owns a single futures contract from each one of those. And we choose.

So, it’s an actively managed fund, which some people want. We choose which contract that will be, based on when the roll period comes, what our parameters are. But you’re still long 25% corn, soybeans, wheat, and sugar, but long in a different way, slightly different way, because you’re long directly the futures rather than being long our other funds.

Andy: All right. So, I have two questions related to TILL and to TAGS. My first question is, why equal weight the four commodities versus, like, market cap weighting?

Sal: Because market cap’s a little different when it comes to ags, and ags are supply and demand, and they can be out of whack. And, you know, the market cap of corn may be multiples larger than sugar or wheat. But that doesn’t mean, you know, corn is gonna perform differently just because of the market cap. These things are completely and totally supply and demand-related. And, if you notice, in our lifetimes, thankfully, there has not been a global famine, where people starved to death because there wasn’t enough. People starved to death because they are denied food for political reasons.

Andy: Yeah. It’s a distribution issue a lot of times.

Sal: And so, if you look at it, there are two conditions in ags that we say exist. One is enough, and that’s when you see prices go up, because there’s enough. Okay. But that’s a little uncomfortable. Then there’s plenty. There’s more than enough. And so, you know, for instance, in the United States, we’re very accustomed to having… So, let’s go back on grains for a minute. Grains are unique in that they grow once a year. All right? So, you plant the seed in the ground in the spring, you wait for it to grow, you cultivate it, it ripens in the summer, it gets harvestable in the fall, you’ve harvested in late fall, it’s in a big pile. Okay?

So, let’s just take corn. There’s a big pile of corn. All right? Everybody in the world taking outta that pile, all winter long, all spring long, because you’re planting the next seed, but it’s not harvestable. All summer long, because it’s growing, but it’s not harvestable. All autumn long, because it’s drying, getting ready to harvest. So, you have to go a full year what you grew in that year. And that pile keeps getting smaller and smaller and smaller and smaller.

So, in the United States, we’re accustomed to having a six to eight-week pile of corn left over at the end. Okay? A cushion. When that pile goes down to four weeks, okay, people get really nervous. They get really nervous. What if something happens to this year’s crop? That’s why there’s always been enough. Thank God there’s always been enough. Okay? But when there’s just enough, prices are really high, generally. Historically. When there’s plenty, prices are flatlined. And so, there’s that golden grain cycle. When there’s plenty, that’s when people should think about layering grains into their portfolio.

Andy: It’s a value play at that point. You’re getting cheap exposure with upside. Yeah, and…

Sal: Correct. The downside.

Andy: Yeah. And, you know, one thing that that brings to mind, when you said that there’s always enough, you know, with some of these, with food, and, you know, how they calculate inflation, there’s a lot of subjects here, but with the substitution effect, or, you know, am I having that technical term right? But if there’s a slight shortage of one commodity, but there’s another commodity that could satisfy consumer preferences, you know, if the price of chicken spikes, I might eat beef more often, or vice versa.

Sal: Correct. And a chicken farmer, if the price of corn spikes, might feed his chickens more soybeans or wheat.

Andy: Right. Okay.

Sal: And in fact, there’s a protein trade, wheat versus corn. It’s just a matter of protein of what you wanna feed your cattle.

Andy: So, real quick. Real quick, Sal. It was about to come off my radar. My other question between TAGS and TILL, though, you kind of mentioned that some investors are wary of the K-1, so they like TILL, and that these two ETPs, or ETFs, are structured differently. Is there one that’s ultimately more cost-efficient than the other? Like, if I don’t care about the K-1 one way or the other, and I just want the most efficient exposure to that diversified basket of these agricultural commodities, is there one that’s slightly more efficient than the other, or are they…?

Sal: That’s hard to say. Because while…okay, so, remember TAGS, it looks like…TAGS not only has its own fees of, I think, 13 bips at the moment, but go by whatever’s in the prospectus, okay? It also, because it owns the other funds, it’s paying those expenses too.

Andy: Right. A fund of funds.

Sal: If you add that up, and I don’t know the math. We can look at the prospectuses, but if you add that up, that’s probably more expensive in fees than TILL. Okay? But TILL only owns one futures contract in each, whereas TAGS owns what we think are the most efficiently-designed funds.

Andy: Ah. So it is an impossible question to answer ultimately, because it’s, they’re just structurally a little different.

Sal: Pretty much. Go by whatever your tax preference is. If you…

Andy: Got it.

Sal: Because K-1s are taxed differently. Commodities are taxed with a 60/40, which is advantageous to a lot of people. So, you know, that’s ultimately probably gonna be your decision.

Andy: Okay. Well, the last ETF I wanna talk about today, this one is OAIA, the Teucrium AiLA Long-Short Agriculture Strategy ETF. So, this one is very unique. It’s a little bit different than the other Teucrium funds. Tell us about this fund. What’s the strategy behind it?

Sal: We believe this fund is unique, that there’s no other ETF like it, that it’s actually creating a category in and of itself. We follow the AiLA indexes. So, the A-I-L-A. That’s AiLA. That is a firm based out of Singapore. And they have a machine learning system that watches thousands of data points in commodities, and creates trades, on a daily basis, creates trades on a daily basis, and it learns as it goes.

So, in other words, if it analyzes, and I’m just making this up, okay, but if it analyzes 2,000 different factors of the soybean market right now, and says it needs to be long soybeans, it needs to be long soybeans based upon what the soybean market has done, when those 2000 data points it’s analyzed are lining up exactly as they are now, okay? It looks back in history and sees what the soybean market did, and will make a trade based on that. Long, short or flat. Okay? And if I had…

Andy: So, this is a machine learning algorithm making the trade without any human intervention?

Sal: That is correct. It’s a multi-factor regression analysis is what it is…

Andy: Understood.

Sal: …that is in a machine. If I had 2,000 of the world’s best traders, looking only at soybeans, okay, or whatever commodity it’s trading, so, this one trades ags, it’s trading agriculture, and I’m just picking on soybeans, and they were all looking at, each one was just assigned to its particular data point, so, I have 2,000 traders, each one looking at a specific data point and what it makes soybean markets do, they still couldn’t agree on a trade and do it fast enough. Only a machine can do this. Okay?

And it learns as it goes. And here’s what’s unique. You’re hearing a lot about AI, you’re hearing a lot about machine learning. There are a lot of people out there right now saying that we can trade commodities or any other market using a machine, and it can do it faster and better than a human. And all of that’s true. But what they don’t have, that the AiLA indexes have, is a six-year published track history. And you can find it on Bloomberg. Okay?

So, we are actually a passive fund. While that strategy is, you know, basically anything but passive, that’s an index that has a track history. All we do is track the index. So, it’s a passive ’40 Act fund, so it checks every box. You know, if people don’t want a K-1, fine. You’re not getting a K-1. If you want passive versus active, there it is. It’s easy. But it’s following an index, using a machine learning system that has a track history. Like, a significant track history. And so…

Andy: So, could I almost think of this like it’s almost like a hedge fund replication type of strategy?

Sal: That’s what it is. You can only get access to this in a private bank product or a hedge fund. And so, what we provide is a liquid alternative, with reasonable ETF fees, we believe, okay, that has a track history. It has a track history. So, this is like going into an experienced hedge fund manager, and past performance is not indicative of futures results. I’m not just saying that, okay? They make us say that, but that’s a real thing.

Andy: It’s true.

Sal: You may not get…

Andy: Especially in the hedge fund world, I think that’s true. Yeah.

Sal: Correct. But if you have a hedge fund manager who’s got a six-year track history, that’s good, okay, and people can go look at the index, it’s on the website, or we point you to it, you know, there’s no guarantee that that’s gonna be replicated, but you might take a shot with that hedge fund manager. This is a machine that learns as it goes, that’s got a six-year track history. And your risk with us is, number one, that that machine will stop…its six-year track history won’t continue on, okay, as effectively. That’s primary, your first risk. Your second risk is that we won’t track the index. Well, we’re futures traders. That’s what we do. So we get the signals, we see what the index is doing, and we just mimic it. That’s all we do. So, the best we can mimic it, with slippage and fees, that’s what you’re gonna get. And it…

Andy: But, and I don’t even know what the expense ratio is, but…

Sal: It’s 1.49%.

Andy: …compared to… And I already talked about this in another episode in this series that we’re doing on liquid alts, but ETFs that are hedge fund, you know, replication ETFs are kind of adjacent to that hedge fund space. I remember, a decade ago, some of these products started coming out and investors were, like, comparing them to a Vanguard fund that tracks the S&P 500, saying, “Well, these expense ratios are way too high. You know, I’m used to 5 basis points, 10 basis points, 20 basis points products.”

But when you compare the fees with these alternative ETFs to, if you’re looking at them as a replacement to an actual illiquid hedge fund, then those expense ratios are way, way less expensive than the fees, expenses that you pay the actual hedge fund.

Sal: Okay. That’s correct. So, a lot of times, the press will say, “Well, this is an expensive ETF.” Well, really? Is it an S&P 500 ETF, that should only be four bips or nine bips or whatever it is, wherever the market is? No. This is, literally, a hedge fund strategy. This is an active, long-short, futures trading strategy that you can only access through an offshore hedge fund or an offshore bank product.

There’s no other way for investors to get access to this. We spotted that, we licensed these products, and we’re putting ’em in the ETF wrapper. We think this is literally the future of ETF. This is…

Andy: And do you have an exclusive license, like, on these indexes?

Sal: We do.

Andy: Okay. So, you have an exclusive license. So nobody can come in and try and replicate…

Sal: For an ETF. No other ETF come in. There are banks using them. There are foreign banks using them. There will be hedge funds using them, okay. But if you wanna pay 2 and 20, or pay, you know, bank fees that, behind the ETN product, are pretty substantial, I’ve been there, I know, and you want an illiquid, non-transparent, you know, limited partnership, well, go ahead. Okay?

We just packaged this that anybody can buy, an institution or an individual, and guess what? Regular people can get access to this strategy, that right now, only institutions and very wealthy individuals can get access to. So, we just kind of have democratized this thing.

Andy: And by the way, I have to say, I’m personally, I’m not anti-hedge fund, I’m not anti-illiquid products, and I’m not against active management and… You know, active management, regardless of what space we’re talking about, it takes smart people, smart men and women, who are experienced, and it’s very time-intensive and labor-intensive. So, I’m not against active management. I’m not against hedge funds. Definitely not against private, illiquid alts. I’m an investor in private illiquid alts.

I’m just pointing out that in the ETF world, people have this tendency to kind of put them all in this single, you know, their ETFs in the ETF bucket. But it’s really important to look at the underlying assets, and think about, well, it’s not just an ETF. What are the underlying assets? What are the underlying strategies? Because sometimes the peer group or the comparative product that the advisor or investor should be looking at might actually be inside a different wrapper.

And sometimes, you know, really, ultimately, they don’t end up being apples to apples, right? Like, ultimately, I don’t know that I can compare, totally, apples to apples, an illiquid hedge fund, with institutional investors, and, you know, ultra-high-net-worth family office-type investors, with an ETF. But it’s a really unique fund that you all have launched. And as you said, it’s a strategy that you brought to market that would otherwise not be available to a retail investor, to a non-accredited investor.

Sal: That’s correct. And beyond that, accredited investors, and even institutions, are gonna look at this and say, “Wait a minute. I have liquidity here. I can get in and outta this thing whenever I want.” So, you know, this is a suitable product from, you know, the smallest retail investor to an institution who only has private placement products, which I’m not against as well.

But, you know, when we look at it with our ETF hat on, how we help the investor, what product do we give to the investor, we truly think this is the future, where you have machine-driven trading. This happens to have a track history, which is a rare thing to find. You probably could compare these. The most comparable thing are to managed futures ETFs. So, there are a handful of them out there. But we don’t see any other products like this that are out there.

Andy: Really exciting stuff. And, by the way, for our listeners and viewers, I’m gonna be sure to link to all of these different Teucrium funds in our show notes page. So, you know, if you want any more information, just go to to check our show notes, and I’ll link to all of them there.

That being said, Sal, can’t thank you enough, you know, for giving us, you know, just the backstory of Teucrium. You all have done so much in the ETF space, and you’re still doing, you know, like, way, you know, 12 years ago, 13 years ago, however many years ago, launching innovative products, you’re still doing that.

God bless you and your entrepreneurship, because, you know, that’s the most exciting part of this space, is just seeing new products launched that ultimately do improve outcomes and choices for investors. And that being said, where can our audience go to learn more about Teucrium and your family of funds?

Sal: is probably the best place. We also have a Twitter handle, @TeucriumETFs, where you can find things going across. But, it’s a wealth of information, and you can contact us directly. We’re here to help.

Andy: Sal, thanks again for coming on the show today.

Sal: Thank you, Andy. Appreciate it.

Andy Hagans
Andy Hagans

Andy Hagans is co-founder and CEO at AltsDb, and host of The Alternative Investment Podcast. He resides in Michigan.