Investor interest in natural resources and commodities has climbed in recent years as demand for these assets grows and as the availability of investment products that include them increases. But when investors are considering natural resource exposure for their portfolio, they should strive for balance.
Investors are paying more attention to these vehicles as global populations grow and as fast- emerging economies such as China, India and Brazil require more resources to fuel their expansion.
In addition, such investment vehicles - from mutual funds and hedge funds - are proving popular as inflation and currency hedges. Further, natural resources tend to provide protection against a weakening dollar since they are inclined to have a negative correlation (move in the opposite direction) with U.S. dollar exchange rates.
Their ready availability also makes it easier and cheaper for investors to include them in their portfolios. Natural resources have a place along with traditional investments in a portfolio. And interest in them is only expected to increase as the world continues to use finite natural resources at unprecedented rates as economic growth rises.
Demand for energy is seen growing by 50 percent in the next two decades, and without large new discoveries, supply isn't expected to keep up. Demand is surging also for copper, steel and aluminum. Other natural resources, such as phosphorus and even fresh, potable water, grow scarcer.
Investments in funds that concentrate in commodities do involve certain risks. Depending on the exposure of their structure, they face increased susceptibility to adverse economic and regulatory developments affecting the sector. In addition, natural resources funds are more volatile on a daily basis because they tend to be more sensitive to economic data and political and regulatory events. Further, there isn't even agreement over what should be included in the natural resources category.
That's why investors should consider a balanced, equity-based approach to natural resources. One way to do this is to consider the FlexShares Morningstar Global Upstream Natural Resources ETF (NYSEARCA:GUNR). The fund was designed to offer balanced natural resource exposure against a range of sectors. In an effort to avoid the risk of an over concentrated portfolio, the fund invests 30% of assets in energy, 30% in agriculture and 30% in metals. The remaining 10% of the fund is split between the timber and water sectors, for added diversification. Overall, GUNR seeks to:
· Provide global equity exposure to natural resource companies in the "upstream" supply chain, establishing an intermediate hedge for inflation
· Provide targeted exposure to five natural resource sectors, which helps investors to mitigate sector concentration risk commonly found with many commodity strategies
· Mitigate contango pricing risks, tax inefficiencies and regulatory uncertainties associated with futures or derivative-based strategies
Discerning investors are evaluating the natural resources and commodities equities sectors for portfolio decisions. In doing so, however, they are evaluating the challenges as well as the advantages. That's why a balanced long-term approach to investing in these vehicles is advised.
Disclaimer: Before investing, carefully consider the FlexShares investment objectives, risks, charges and expenses. This and other information is in the prospectus, a copy of which may be obtained by visiting flexshares.com. Read the prospectus carefully before you invest.
Foreside Fund Services, LLC, distributor.
An investment in the Fund is subject to investment risk, including the possible loss of principal amount invested. The Fund is subject to the following risks: asset class risk; commodities risk; concentration risk; currency risk; derivatives risk; emerging markets risk; foreign securities risk; global natural resources industry risk; issuer risk; management risk; market trading risk; non-diversification risk; passive investment risk; small cap stock risk; and tracking error risk. Please see the prospectus for a complete description of risks.
In addition, the FlexShares Morningstar Global Upstream Natural Resources Index Fund is subject to the global natural resource industry. As the demand for or prices of natural resources increase, the Fund's equity investment generally would be expected to also increase. Conversely, declines in demand for or prices of natural resources generally would be expected to cause declines in value of such equity securities. Such declines may occur quickly and without warning and may negatively impact your investment in the Fund.
Disclosure: I am long GUNR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it.