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Commodity ETFs

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With over 300 ETFs launching in 2011, it has been a crowded year on the product development front to say the least. The period saw funds launch in every imaginable category as well as the debut of several new issuers. Beyond these brand new companies, one firm, Northern Trust, gave a second go at the ETF world after its poor showing a few years ago. This time around, however, the company appears to have learned its lesson and is off to a roaring start, especially with the FlexShares Natural Resources Index Fund (GUNR - ETF report).

This ETF, which debuted in September, has already amassed more than $150 million in assets, a pretty remarkable feat for such a small issuer in a hotly contested space. In fact, the fund already trades about 76,000 shares a day ensuring that ample liquidity is present and that tight bid ask spreads shouldn’t be too hard to find for those that are looking to make a play on this ETF. After such an uninspired start to Northern Trust’s foray into the ETF world, one has to wonder what has made things different this time around. Arguably, the fund’s unique methodology and focus in the commodity-producer space has helped to generate the considerable buzz that GUNR has achieved in just one fiscal quarter on the market (read Forget WTI, Play Crude With This Oil ETF). 

Global Upstream Natural Resource ETF In Focus

GUNR tracks the Morningstar Global Upstream Natural Resources Index which is a benchmark of global companies in a variety of commodity producing sectors. The fund maintains a focus on firms in the energy, metals, and agriculture segments but it also has exposure to companies that are in the timberland and water sectors as well. With this approach, GUNR looks to maintain a spotlight on what the fund sponsors refer to as the ‘upstream’ portion of the supply chain, or those companies that are at the heart of the production of key commodities (Time To Consider The Small Cap Oil ETF).

The idea behind this strategy is that these commodity firms are the most exposed to the supply chain at its core and can easily pass on costs to those further down the line. This ensures that these companies are huge beneficiaries from any commodity boom and that if inflation strikes they will be among the least impacted. This focus could be ideal for those seeking a quality way to hedge against inflation with commodity producing equities or those who are looking for commodity producers in the truest sense of the word (see Forget UNG: Try These Natural Gas ETFs Instead).

Companies that fall into this segment include some of the largest firms in the world such as ExxonMobil (XOM - Analyst Report), BHP Billiton (BHP - Analyst Report) and Potash Corp of Saskatchewan (POT - Analyst Report). In terms of sector exposure, integrated oil & gas companies and fertilizer/agricultural chemical producers combine to make up close to half of the holdings although diversified metals (17%) and gold producers (9.9%) make up sizable chunks as well. Lastly, true to its global name, the fund allocates just under 44% of its holdings to American firms, giving high weightings to Canadian (15.4%), British (10.5%), and Australian firms (7.2%) to round out the top four nations.

Clearly this approach is being met with a great deal of interest by numerous investors who are seeking to find new ways to play a commodity boom. Whether GUNR is a better way to access these markets remains to be seen as it is hard to compare the fund on a performance basis given its incredibly short-track record. Nevertheless, GUNR has been in the middle of the pack from a performance perspective over the past three months as it has outperformed some competitors—such as (RJI - ETF report) and (HAP - ETF report)—but it has underperformed others, such as (IGE - ETF report) (see Is HAP The Best Commodity Producer ETF?).

Thanks to this middle of the road performance and the short-time frame, the real test for investment should go far beyond performance. In terms of expenses, GUNR is also in the middle of the road but is very close to others in the category while the volume is also comparable. As a result, the real question should be over the fund’s ‘upstream’ focus and if this will lead to outperformance. If you think that focusing on these firms that have the most exposure to commodities is the way to go then GUNR will be tough to beat over the long haul and could warrant a small allocation in a well diversified portfolio.

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