Before exchange traded funds (ETFs), investing in commodities meant either opening up an account to trade futures contracts or holding physical natural resources like gold and oil. Now, with assets in global ETFs recently passing the $4 trillion benchmark, it has never been easier for retail investors to gain access to broad commodities exposure at a very low cost through global natural resource funds. This is especially beneficial for investors seeking new opportunities to diversify their portfolios since the equity market rally that has taken place over the last 8 months has left most stock values significantly higher than historic averages.
While there are ETFs that can give you pure exposure to the commodities market through futures contracts, they come with many disadvantages such as lack of dividends, increased volatility, large expense ratios, and the potential for contango. Contango refers to a situation where the future spot price is below the current price, and people are willing to pay more for a commodity at some point in the future than the actual expected price of the commodity. Contango can have negative effects on a portfolio, eating into returns and potentially generating losses for investors.
These problems not only hold true for those who use futures-based ETFs but also for those who use actual futures as their commodity exposure. Global natural resource ETFs avoid these risks by holding the stocks of commodity-related companies such as Exxon Mobil (XOM), Monsanto (MON), and Newmont Mining (NEM) instead of futures contracts. As the prices of the commodities these natural resource companies sell/produce go up, they become more profitable, which also makes them a good hedge against inflation.
Historically, stocks that are linked to the production of commodities behave differently than, and in some cases even have an inverse relationship with, the rest of the equity market. This is why commodity-related industries (like energy and mining) have recently underperformed relative to the rest of the stock market which has been setting record highs over the last few months. Therefore, if you are like many other investors who are worried about the sky-high valuations in the market currently, then these undervalued global natural resources ETF may give you the buy-low sell high strategy you’ve been looking for.
There are currently five global natural resource ETFs traded on the NYSE. We screened out funds with less than $100 million AUM. Thus, the focus of our comparison will be on the three largest global natural resource ETFs currently available:
The most important research into any ETF is knowing the methodology of the index that the fund tracks. The methodology will explain the fund’s performance, turnover, and allocation. Below is a summary of the index for each fund.
At first glance, it seems like the three funds provide similar exposure and are not significantly different from each other. A deeper analysis will show that each of these ETFs provides unique benefits that should be carefully considered when making your investment decision.
A variety of different metrics can be used to evaluate ETFs. Some of the most popular include liquidity, expenses, yield, holdings/exposure and performance. All data collected for comparing these metrics comes from both ETF.com and Morningstar Office as of 7/15/2017.
Liquidity: GUNR
Expenses: GNR
Yield: GNR
Commodity Exposure: GRES
Performance: GNR
Symbol | Past Rate of Return (%) | |||
YTD | 1 Year | 3 Year | 5 Year | |
GRES | 2.47 | -1.11 | -3.03 | 0.69 |
GUNR | 3.27 | 8.69 | -4.57 | 0.46 |
GNR | 5.51 | 12.38 | -3.94 | 0.90 |
*This data was collected using Morningstar Office as of 7/15/2017
Symbol | Sharpe Ratio | |||
YTD | 1 Year | 3 Year | 5 Year | |
GRES | 0.39 | -0.32 | -0.28 | 0.10 |
GUNR | 0.08 | 0.61 | -0.30 | 0.07 |
GNR | 0.41 | 0.90 | -0.27 | 0.11 |
*This data was collected using Morningstar Office as of 7/15/2017
The figure below shows the different metrics used in this article to measure the strength of each ETF. The best performer in each category is indicated with a checkmark in the winning fund’s respective box.
Symbol | Liquidity | Yield | Expenses | Exposure | Performance |
GRES | ✔ | ||||
GUNR | ✔ | ||||
GNR | ✔ | ✔ | ✔ |
These global natural resource ETFs each provide their own unique benefits for investors. A portfolio that rebalances frequently or has high turnover would be best suited with GUNR because of its high level of liquidity and low bid-ask spread. A strategy that attempts to limit risk and exposure to the equity market while also maximizing the number of commodity related holdings in the fund would see GRES as their best option. Investors looking for a more well-rounded, long-term option with strong performance, low costs, and a high yield should use GNR as their global natural resource fund of choice.
Index Methodology Links:
The links below will take you to the methodology/construction rules for the index that each global natural resource ETF tracks.
GUNR:
GRES:
GNR:
By: Quentin McTeer, Research Analyst Intern
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