High-yield and low-volatility funds attract all the attention,
but gobs of net new money has flowed into natural resources
in 2012, lifting total ETF assets focused on the theme to more than
Themes like natural resources hold appeal as a twist on sector
investing. They rely on top-down macro views like sector funds, but
they bring their own investment thesis to the table. In other
words, they're not just building blocks for investors to fit into
their own macro views.
The investment thesis for natural resources is a mix of indirect
commodity exposure, inflation hedging and price appreciation, all
underpinned by exposure to long-term global demand for the raw
materials necessary to meet the end needs of a growing world
The funds use equity exposure to commodities rather than more
direct exposure in the name of simplicity. After all, getting
exposure with futures or by holding physical commodities leads to
complexities like contango from futures curves and K-1 tax forms
that commodity pool structures require.
The trade-off is generally weaker correlation to commodity
prices-the difference between spot gold prices and gold miner
stocks being one of the most obvious examples.
Broad commodities this year have given investors a wild ride
without much to show for it. Recent reports of oversupply may have
some investors questioning whether a natural resources play makes
sense now. But some savvy commodity players buy on the dip, and the
natural resources play I'm talking about here is a long-term
Fund issuers can doubtless make a more compelling case for
natural resources than I have here. Indeed, asset flows into the
space suggests they've done just that, and that investors are
buying the pitch.
Theme And Variation
GUNR leads with gains of 6.8 percent, closely followed by the
Market Vectors RVE Hard Assets Producers (NYSEArca:HAP) at 6.7
percent. GNR and IGE meanwhile returned 4.7 percent and 0.7
The 6-percentage-point difference between the best and worst
performers of the group matters of course, but two other points
stand out. First, the funds' patterns of returns don't vary wildly
from each other; and second, all four funds show lots of
Some further context would help.
Here are the same four funds over the same period with two
reference points thrown in:a U.S. equities proxy, the SPDR S&P
500 ETF (NYSEArca:SPY), and a broad commodities proxy, the
PowerShares DB Commodity Index Tracking Fund (NYSEArca:DBC).
Again, my focus is on the pattern of returns rather than the
finish line. Over the longer term, the two natural resources funds
look less like commodities. What's more, they look quite volatile,
though they have more upside than commodities.
My takeaway here is twofold. Firstly, the global resources theme
really does appear to deliver something quite different from both
commodities and broad equities in the longer term. Secondly, the
theme's volatility should be part of your decision to even wade in
But this much is totally clear:There's good news here in that
strong investor interest in GUNR and GNR makes them viable options,
with lower trading costs and greatly reduced fund closure risk.
At the time this article was written, the author had no
positions in the securities mentioned. Contact Paul Britt at
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