S&P Natural Resources ETF: Yield with potential for capital appreciation
Investment Thesis: Global Natural Resources ETFs offer investors an attractive return and broad diversification across the materials and energy sectors. Investors who want exposure to these economic sectors should seriously consider this ETF.
The ETF Global Natural Resources (GNR) is very interesting. Here is its basic composition:
The S&P Global Natural Resources Index is comprised of 90 of the largest publicly traded U.S. and foreign companies, by market capitalization, in the natural resources and materials sectors (as defined below) that meet certain investment requirements. The securities that make up the index represent a combination of the securities that make up each of the following three sub-indices: the S&P Global Natural Resources – Agriculture Index, the S&P Global Natural Resources – Energy Index and the S&P Global Natural Resources – Metals and Mining Index. The weighting of each sub-index is equivalent to one third of the total weighting of the Index.
Rather than focusing on commodities (like the XLB) or energy (like the XLE), the ETF combines the two under one big tent.
Here is the sector weighting:
And here are the 10 largest farms:
Several key macroeconomic statistical groups tell us about the growth potential of this ETF: commodity prices (which indicate the pricing power of commodity companies), industrial activity (which shows the demand for commodities ) and energy market dynamics (which shows the supply and demand picture for the energy portion of this portfolio).
We will take them in the order presented.
Commodity prices appear to have peaked:
Iron ore prices (top right) have fallen sharply. Aluminum (bottom left) and coal (bottom right) prices are also down. Only copper prices (top left) are still at highs.
This coincides with widespread weakness in leading PMI indicators from Markit Economics.
The Global Aluminum Users PMI™ fell into contractionary territory for the first time since June 2020 at the start of 2022, as the company reported further modest reductions in production levels and new orders.
Global copper users reported flat operating conditions in January, following 18 consecutive monthly expansions. Both production levels and incoming orders have been reduced at the fastest rate since May 2020.
Global steel users reported that production and new orders slipped back into contractionary territory in January after further expansions in December.
Once the raw materials are produced, they are sold to manufacturing entities. While manufacturing is still expanding, activity is slowing down:
The start of 2022 saw the rate of expansion of global manufacturing output slow to its weakest pace in the current 19-month recovery.
For the materials side of the ETF, the macroeconomic picture is softening as companies will soon start losing their pricing power. But the demand is still strong. Overall, the data has peaked, but there are no signs of a major contraction.
Now let’s move on to the ETF’s energy component, which accounts for 40% of its holdings. There, the story is much better.
Oil prices are near a one-year high.
The demand is also increasing. The following excerpts are taken from OPEC’s latest monthly report.
- OECD Americas: Oil demand in the OECD Americas continued to accelerate amid the spread of the Omicron variant and slowing economic growth in November.
- OECD Europe: The latest data available from November implies robust oil demand in OECD Europe, particularly supported by transport and industrial fuels, and despite the spread of Omicron.
- OECD Asia-Pacific oil demand in November increased by almost 0.3 mb/d year-on-year, following a 0.5 mb/d increase in October, mainly supported by strong demand for naphtha, which increased for the ninth consecutive month.
- Chinese oil demand regained momentum in December after oil demand growth slowed slightly in November and following localized COVID-19 containment measures in parts of the country.
- The latest available Indian data from December shows marginal growth in oil demand of 20 tb/d year-on-year. Severe weather in November, with fallout in December, and COVID-19 containment measures in parts of the country dampened oil demand.
- In November, oil demand in Latin America increased by 0.1 mb/d year-on-year, slightly less than in previous months.
- In the Middle East, the latest available data from November 2021 implies a year-on-year increase of 0.3 mb/d, higher than the growth seen in October, and with demand levels slightly above those of the pre-pandemic period. .
Here, the bigger picture is bullish.
Now for the GNR charts:
The weekly (left) and daily (right) charts are bullish.
As a final bonus, the ETF has a nice return:
The Global Natural Resources ETF offers investors broad exposure to the basic materials and energy sector. The fundamentals are bullish and the ETF is performing well. This is a great way to play these sectors.