The evolution of the exchange-traded fund industry has certainly democratized the commodity investing world, with investors now able to gain cheap and easy access to nearly every corner of this lucrative asset class. And while commodity producer ETFs remain a hot ticket item, there is still room for growth on the production development front. Paul Zimnisky, CEO at PureFunds, recently took the time to discuss the compelling “pure play” ISE Mining Services ETF (MSXX) and his thoughts on where he thinks the mining industry might be heading [see Free Report: How To Pick The Right ETF Every Time].
ETF Database (ETFdb): What was the inspiration behind creating the Mining Services ETF (MSXX)?
Paul Zimnisky (PZ): It was the inability to easily invest in the space, there are only a
ETFdb: How does MSXX separate itself from existing offerings in the Commodity Producers Equities ETFdb Category?
PZ: The companies in MSXX have very different business models then the producers, these companies contract out drilling and engineering services or they manufacture and sell mining service equipment to the producers. Think of these companies as the ones selling the shovels and picks during the gold rush. The investment community has split the service and producer companies in the oil and gas industry and there has been tremendous success of the oil service ETFs. We are doing the same thing here but with the mining industry.
ETFdb: From a fundamental perspective, how are the mining service companies included in this ETF different from commodity producers, which often times offer leveraged exposure to the spot prices of the resources produced?
PZ: The leverage that comes with owning a producer is the potential for the price of the commodity being produced to rise faster than the cost of producing it. The service companies generally don’t produce, so they don’t have the same exposure to this price leverage, but they are contracting out their services on a pre-agreed upon rate. The benefit to the service industry companies’ business model is that these pre-agreed rates offer predictability in revenue and don’t have the same degree of exploration or execution risk as the producers. That being said, the service industry is still exposed to commodity prices, for example, if the demand of commodities increases the producers will ramp up their businesses which will also increase the demand for the service providers [see also Everything You Need To Know About Commodity ETFs].
ETFdb: Broadly speaking, what positive catalyst do you see on the horizon that could fuel a rally in the mining service industry? What are some of the risks associated with this asset class?
PZ: I think that the demand for mining services is a longer term trend. As resources become less available and more valuable I would expect the service companies to continue to benefit; the merger and acquisition activity in the industry over the last few years supports this. That said, these companies are sensitive to the spending cycles of the explorers and producers. The mining service firms do best when the explorers and producers are spending a lot of money on new projects, so if demand for resources falls off the demand for service companies will too [see Mining Boom ETFdb Portfolio].
ETFdb: How might MSXX fit into a portfolio? Would you consider this as a core, or more tactical holding?
PZ: I would consider this a tactical ETF, due to specitivity and scope, its one of the best ways to get exposure to the mining industry and can be a great way to represent the mining segment of a portfolio, especially for the investor who wants to be in the resource space but doesn’t want the exploration or development risks that come with the production companies. It could also be used as a compliment holding in either a portfolio of exploration and production stocks or a portfolio of physically-backed ETF holdings.
Bottom Line: While there are numerous options in the mining ETF space, MSXX stand out from the rest, putting a compelling twist on the mining industry. The fund allows investors to establish a tactical tilt towards companies that provide mining services and equipment to the producers, an industry that has experienced tremendous growth over the years.
Disclosure: No positions at time of writing.