With such an uncertain market, broad allocations across the equity world seem destined to disappoint investors, at least in the near term. One way to play the environment could be to seek out top-ranked sectors and only invest in securities in those spaces. This strategy may allow investors to only focus in on those sectors that are poised to rise in the near future while hopefully avoiding the worst of the downturns that have been prevalent as of late. One intriguing industry that could fall into this category is the fertilizer space where growth is abundant and demand could be nearly recession-proof.
This is because fertilizer is a key component of global food production and with the ever rising world population, a robust supply of staple products is becoming increasingly important. This is especially true given that close to two billion more people are expected to be living by 2050, putting extra strains on food supply chains across the world. As a result of this, global fertilizer consumption has been growing at a steady 3% over the past 15 years and could continue to surge, especially if current predictions—which call for a 30% increase in grain and oilseed consumption by the end of the decade—come to fruition (see Inside The SuperDividend ETF).
Thanks to these trends, many companies in the fertilizer space have been able to hold their ground when compared to their peers in the broad agriculture sector, making them solid investments in this uncertain time. Furthermore, many companies have seen positive earnings revisions as of late, helping to push the overall rank of the sector pretty high when compared to its counterparts. In fact, the fertilizer sector is currently ranked in the top 20 among all Industries according to our research, suggesting that the space could be due for outperformance in the near future. While buying up any of these stocks could be a decent investment, for those looking to get broad access to the space an ETF tracking the sector exists as well, the Global X Fertilizers/Potash ETF (NYSEArca:SOIL - News).
This relatively new fund from the New York-based ETF issuer tracks the Solactive Global Fertilizers/Potash Index which is a benchmark of about 30 securities that measures the performance of the largest and most liquid listed companies from around the globe that are active in some aspect of the fertilizer industry. Although the fund is relatively new and has assets of just under $30 million, SOIL has volume of about 70,000 shares a day which is enough to produce relatively tight bid/ask spreads for most investors (see Top Three Precious Metal Mining ETFs).
The fund holds all eight of the securities that are in the Zacks Industry of Fertilizers including top rated Yara International (Other OTC:YARIY.PK - News) as well as highly-rated Agrium (NYSE:AGU - News) CF industries Holdings (NYSE:CF - News), and CVR Partners (NYSE:UAN - News). The fund also includes weightings to Intrepid Potash (NYSE:IPI - News), Mosaic Company (NYSE:MOS - News), Potash Corp of Saskatchewan (NYSE:POT - News) and Sociedad Quimica Minera de Chile (NYSE:SQM - News) although these four are currently rated as 3s . Beyond these firms, the product also tracks a number of securities that are not ranked by Zacks—due to their geographic location—but are in the fertilizer industry nonetheless. So while U.S. stocks take the top spot at just over 22% of assets, firms from Israel and Canada also make up more than 10.9% each while firms from a host of emerging markets, including China, Brazil, Russia, and Chile, also receive decent sized allocations as well.
This results in a portfolio that is very well diversified from a geographic perspective, giving allocations across five continents. Furthermore, no one security makes up more than 6% of total assets so company-specific risk is pretty much non-existent in the fund. In terms of performance, SOIL has had a rough time over the past few months but given the positive earnings revisions in many of the companies in the space, as well as possibility of a broad market turnaround, this could change in short-order, especially if firms live up to their earnings expectations (see Top Three High Yield Real Estate ETFs).
However, it is important to remember that the fund isn’t a direct proxy for the fertilizer industry as ranked by Zacks, for a few reasons. First, the product obviously has a greater number of securities more than what our rank currently is tracking. As a result, the rank of the industry could be worse if these other securities are included (although it could also rise as well). Secondly, it is important to remember that SOIL tracks companies that are engaged in some aspect of the fertilizer industry and do not necessarily have to be entirely devoted to the space. This could also make the fund deviate from how the Zacks industry performs as a whole or make the fund outperform (or lag) companies that have more of their revenues tied to the fertilizer space. Nevertheless, the product could make for a nice diversified play on a sector that could be poised to outperform in the near term or at the very least, surge over the long-term thanks to favorable demographic trends and rising demands for higher quality food in the developing world.
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