ETFs - natural selection

Natural resources are taking up more space in portfolios as investors seek to diversify. Joanne Young reports on the growing number of options available in ETPs

Natural resources ETPs have been enjoying a boom of late. Not only have returns over the past six months consistently reached double figures, but investors are increasingly turning to natural resources as a means of portfolio diversification and as an inflation hedge.

ETF Securities recently revealed assets in global commodity ETPs hit record highs at the end of the first quarter of this year. At $174bn, the asset class remains a relatively minor segment of the industry, but it is one that is attracting more and more headlines.

The performance of the market also seems to be inspiring growth. Over the 12 months to April, ETFS Physical Gold and Physical Silver generated returns of 20% and 108% respectively. ETFS head of research and investment strategy Nick Brooks says: “Investors are starting to broaden their horizons beyond the traditional choices of gold and silver.”

Diversification
Europe’s Underatakings for collective investment in transferable securities (Ucits) regulations dictate diversification requirements, which mean investment vehicles tracking a single commodity group cannot qualify as funds. Consequently, most natural resources ETPs are structured as debt securities, known as ETCs.

There is, however, a rapidly expanding range of thematic equity ETFs that play on the natural resources story, although these are not included in ETFS’ global growth figures.

In addition to the widely referenced GSCI index family comprising commodities futures, S&P calculates a number of themed equity indices. These include its Global Natural Resources, Global Water and Global Timber and Forestry indices, all of which have been licensed to ETF issuers.

S&P global equity and strategy indices vice president Alka Banarjee explains S&P considers natural resources an expansion of the commodities asset class. She says: “Natural resources is a broader concept I think, and encompasses the companies engaged in production as well, such as agribusiness.”

The SPDR S&P Global Natural Resources ETF, which tracks a basket of the 90 largest companies involved in agriculture, metals and mining, and energy, has returned 6.55% over the last six months. The equivalent figure for a similarly broad futures-based ETC – the ETFS All Commodities DJ-UBSCI – is 9.72%.