Investors Pile Into Newer Resources ETFs


High-yield and low-volatility funds attract all the attention, but gobs of net new money has flowed into natural resources ETFs in 2012, lifting total ETF assets focused on the theme to more than $3 billion.

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 population.

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 one.

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

Here’s a list of the top four ETFs in the space by assets under management, with a column for year-to-date 2012 net asset flows


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Flows and AUM



The iShares S'P North American Natural Resources (IGE) is the largest fund by assets, and trades the best, as well. The fund’s name hits on a key distinction—geographic coverage. IGE confines itself to U.S.-listed stocks; namely, 75 percent U.S.-focused and the other 25 percent Canadian companies.

Still, net fund flows tell us that in 2012, investors have bypassed IGE—the granddaddy of these funds that was launched in 2001—in favor of a pair of newer offering that bring global scope.

Those so-far successful newcomers are the FlexShares Morningstar Global Upstream Natural Resources ETF (GUNR) and the SPDR Global Natural Resources ETF (GNR), and the “Global” moniker they share is important to their success.

These two similar-sounding funds have raked in more than $700 million in new money in 2012, suggesting that broader geographic coverage matters to investors. The two funds still have significant exposure to North America but also include the U.K., Australia, Switzerland and Russia, among other countries.

Still, it’s the sector and industry exposure rather than geographic coverage that gives real insight in what these funds do. GUNR and GNR hold huge chunks of oil and gas; metals and mining; and chemical firms.

Note how these industries cut across sector lines, which is the essence of themed funds. Sector funds and the industries within them are by definition nonoverlapping.

But themed plays like natural resources ignore sector boundaries, and instead get exposure to the industries that fit into the theme, regardless of the sector they belong to.

In this case, the two funds hold oil ' gas stocks from the energy sector as well as chemicals and metals ' mining stocks from the basic materials sector.

Performance Snapshot

Here’s how the four funds stack up year-to-date.


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4 funds YTD


GUNR leads with gains of 6.8 percent, closely followed by the Market Vectors RVE Hard Assets Producers (HAP) at 6.7 percent. GNR and IGE meanwhile returned 4.7 percent and 0.7 percent, respectively.

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 volatility.

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 (SPY), and a broad commodities proxy, the PowerShares DB Commodity Index Tracking Fund (DBC).


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4 funds YTD SPY DBC


This chart is tough to read, but it’s clear that equities have beaten the pants off broad commodities for the year. More importantly, the pattern of returns for the funds sure looks a lot more like commodities than equities, which is consistent with their thesis.

Boosters of natural resources ETFs tout their value as longer-term investments, so the 2012 snapshot doesn’t help much there. The chart below shows returns over the past four years. GUNR and GNR have dropped out since they aren’t old enough.


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2 funds SPY DBC 4 years


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 here.

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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