An ETF for Exposure to Global Natural Resources
11/21/2017 5:00 am EST
The late stages of an economic cycle are usually good times for resource companies. Prices of key materials move higher, usually pushed by inflation, and shares of the companies that produce them follow suit, asserts Gordon Pape, editor of Internet Wealth Builder.
Although this is not a typical economic cycle, we're seeing some of that now. Copper is trading at three-year highs. Aluminum is at levels not seen since 2012.
Oil has rebounded from its January 2016 low of US$29.67 and appears to be stabilizing in the US$50 range. Lead is creeping higher. After a big drop in 2014-15, nickel is moving off its lows. Iron ore is following a similar pattern.
All this is happening without the traditional driving force of inflation, which remains muted in most industrialized countries. What we're seeing is simply supply and demand forces at work.
Normally, income investors avoid resource stocks, and for good reason. They rarely provide decent cash flow and they are highly volatile. You have to be an adept trader to get in and out at the right time. That's why I never recommend them in this newsletter.
But to any rule, there are exceptions when the time is right. With the S&P/TSX Base Metals Index up nearly 20% year to date, this could well be the time to consider the right kind of resource exposure.
Right now I see an opportunity for those who are willing to take on a higher degree of risk with a view to buying a security that offers both cash flow and potential for capital gain. It's the SPDR S&P Global Natural Resources ETF (GNR).
This ETF, distributed by State Street Global Advisors, invests in 92 international large-cap stocks in three sectors: agriculture; energy; and metals and mining.
GNR gives us exposure to the world's greatest resource companies. It has been on a strong run this year, with a year-to-date gain in market value of 12.6% to the end of September. It has a reasonable management expense ratio of 0.4% and generates some cash flow.
About 60% of the portfolio is in the materials sector, with 34% in energy and the rest split between consumer staples and real estate. Geographic distribution favors North America, with about 31% in the U.S. and 11% in Canada. The U.K. has 16% of the assets, and Australia accounts for about 11%. The p/e ratio is 16.7.
As mentioned, the resource sector is historically volatile, so there is more risk than income investors are used to. This is not a buy-and-hold security; it is for opportunistic investors only. Don't expect to hold it for longer than a year, perhaps less.
Payments are made twice a year, in June and December. The amounts can vary significantly, so this is not a security to buy if you need regular, predictable cash flow.
This ETF is suitable for investors who would like diversified exposure to the resource sector and are prepared to accept above-average risk.
This is an opportunity to take a position in a sector that is currently generating above average returns, albeit with enhanced risk. GNR is a Buy for aggressive investors.