My Livestock Trade from Last Night's Fast Money

In case you missed my latest appearance on Fast Money‘s Prop Desk last night, below is a clip about the Livestock Trade that appears to be taking off.

Watch the video and then I want to give you a quick idea about how this works…

The vehicle mentioned, COW, is an ETN (exchange traded note) from UBS.  What that means is that it buys the futures contracts for both Lean Hogs (40%) and Live (Beef) Cattle (60%).  It then rolls those contracts to the next month periodically.  There are some risk factors here to be aware of:

1.  An ETN differs from an ETF in that there are no underlying assets here, just the futures contracts themselves.  The intention of the product is to give investors the return of the livestock commodity subindex minus fees (75 basis points annually).  Your credit risk here is that of the issuer, in this case UBS.

2.  Contango is also a prominent risk whenever you’re in a futures-related fund.  COW will be rolling from the February to the April contracts between the 5th and 9th trading day of this month.  So far, contango doesn’t look to be an issue on this roll but investors should be aware of it going forward.

3.  Live Cattle and Lean Hog prices, while promising based on the factors I listed last night, are still commodities and as such they are subject to bouts of extreme volatility.  This is a game for the big boys; I recommend that people determine first whether or not something like this is appropriate for their situation followed by a rational decision about position-sizing within a portfolio.

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