Barchart.com ETF Research
Barchart.com's Picks in the "Equity-Commodity Producer Index" and "Equity-Agriculture" Sectors
ETF Research written by the Barchart.com ETF Research Team
Last Updated: December 27, 2010
Table of Contents
This report covers exchange-traded funds (ETFs) that track the stocks of companies that are in the business of producing commodities or of harvesting natural resources. There are three main areas involved under the broad heading of commodity producers: energy, metals/mining, and agriculture. This report will discuss ETF products that cover multiple commodity producer sub-sectors in a single ETF as well as ETF products that focus on just agricultural commodity producers. We will discuss energy and metal/mining ETF products in separate reports.
IGE - iShares S&P GSSI Natural Resources Index Fund (web site link) – IGE, launched a long time ago in October 2001, has a hefty $1.9 billion in assets under management and is by far the largest ETF in this group. The problem with this exchange-traded fund is that it only includes U.S.-listed energy and mining companies and does not have any agricultural companies. In addition, the weighting of this fund is heavily skewed towards oil & gas companies, which means that this is basically an oil & gas ETF with a few mining companies thrown in. The top seven holdings are oil companies that alone account for 33% of the fund with holdings such as Chevron, Exxon Mobil, Schlumberger, ConocoPhillips, Occidental and Suncor Energy. Mining companies finally show up as the eighth and ninth largest holdings with Freeport-McMoran Copper at only a 2.9% weighting and Barrick Gold Corp at a 2.7% weighting. This fund has an expense fee of 0.48%.
HAP – Van Eck Market Vectors - Hard Assets Producers ETF (web site link) – HAP, launched in August 2008, currently has $186 million in assets under management. The sector breakdowns for this exchange-traded fund are as follows: energy 40.8%, agriculture 31.0%, industrial metals 13.1%, precious metals 7.1%, paper and forest products 4.0%, alternatives 4.0%. The five largest holdings are XOM-Exxon Mobil (5.20%), POT-Potash (5.05%), DE-Deere (3.50%), MON-Monsanto (3.06%), and SYT-Syngenta (2.79%). This fund holds 318 global stocks, which is an unusually large number of stocks for an industry sector ETF. The fund’s country breakdown is U.S. 38.2%, Canada 14.7%, UK 7.9%, Australia 4.4%, Switzerland 4.1%, Brazil 3.1%, and the remaining 35 countries 27.6%. The fund currently has a net expense fee of 0.65%.
CRBQ – Thomson Reuters /Jefferies CRB Global Commodity Equity Index Fund (web site link) – CRBQ, launched in September 2009, has $100 million in assets under management. This exchange-traded fund tracks the “Thomson Reuters / Jefferies CRB In-The-Ground Global Commodity Equity Index.” The fund currently has a 38.8% weight in agriculture, 36.5% in energy, 12.9% in precious metals, and 11.8% in base/industrial metals. The country breakdown is as follows: U.S. 33.4%, Canada 17.7%, UK 10.2%, Switzerland 4.0%, Brazil 3.3%, Russia 2.6%, South Africa 2.4%, Australia 2.2%, Singapore 2.0%, and France 1.9%. The top five holdings are XOM-Exxon Mobil (5.71% weight), POT-Potash Corp of Saskatchewan (5.42%), MON-Monsanto (4.58%), DE-Deere (4.57%), SYT-Syngenta (3.50%). The fund holds 150 stocks, including stocks held on foreign exchanges. The fund has an expense fee of 0.65%.
GNR - SPDR S&P Global Natural Resources ETF (web site link) – GNR, recently launched in September 2010, has only $28 million in assets under management. The fund tracks the S&P Global Natural Resources Index, which places a one-third weight on each of three sub-indexes: S&P Global Natural Resources – Agriculture Index, S&P Global Natural Resources – Energy Index, S&P Global Natural Resources – Metals & Mining Index. This fund holds 90 global stocks. The fund has a low expense fee of 0.40%.
GRES - IQ ARB Global Resources ETF (web site link) – GRES, launched in October 2009, has a relatively low $35 million in assets under management. The fund tracks the IQ Global Resources Index, which uses a rule-based strategy with momentum and valuation factors to attempt to choose attractive stocks in the commodity producer space. The fund also uses a broad equity market short hedge to increase its exposure to the commodity sector, which is a hedge fund technique that is unusual to see in an ETF product. The fund has an expense fee of 0.65%.
Investment conclusion – Our pick in this group is the Van Eck Market Vectors - Hard Assets Producers ETF (HAP). In making our decision on this group, we first excluded from consideration iShares S&P GSSI Natural Resources Index Fund (IGE). Despite the fact that IGE is the largest ETF in this group at $1.6 billion in assets under management, the fund has several unattractive factors in our opinion: (1) the fund has a heavy concentration on oil companies and does not include any agriculture companies, and (2) the fund is limited to U.S.-listed companies and does not have exposure to the attractive commodity producing companies that are listed elsewhere in the world.
Regarding the other ETFs in this group, we like the methodology of GNR in assigning a simple one-third weight to each of the commodity sub-sectors of energy, metals/mining, and agriculture. We definitely like this fund more than IGE based on the sub-sector weights. However, this fund has less than $50 million in assets under management at this time and so we would avoid this ETF for now. Regarding GRES, the sponsor company “Index IQ” should be commended for offering a more intelligent vehicle for investing in the commodity producer space than a plain vanilla ETF. However, GRES has yet to attract significant assets under management. In addition, GRES has significantly underperformed HAP so far, as seen in Figure 1. Nevertheless, GRES bears watching in the future to see if it can gather assets and outperform its benchmarks.
Figure 1: HAP-Van Eck Hard Assets Producers ETF vs GRES-IQ Global Resources ETF (live chart)
Having sifted out all the other ETFs in this group, our decision comes down to choosing between the Van Eck Market Vectors - Hard Assets Producers ETF (HAP) and the Thomson Reuters /Jefferies CRB Global Commodity Equity Index Fund (CRBQ). This is a close decision because the two funds are very similar and, as Figure 2 illustrates, they also have very similar performance. They also have the same expense fee of 0.65%. However, we chose HAP because (1) HAP has exposure to a broader array of companies and a little less weight on the biggest companies in the sector, (2) HAP has more assets under management, which gives it more liquidity and more assurance of longevity, and (3) HAP is run by Van Eck, a long-term player in the ETF and commodity space as opposed to Jefferies Asset Management LLC, which runs CRBQ and is a relative newcomer to the ETF space.
Figure 2: HAP-Van Eck Hard Assets Producers ETF vs CRBQ- Jefferies CRB Global Commodity Equity ETF (live chart)
The agricultural commodity producer group focuses on companies that produce agricultural-related products or services. With the growing world population and the increase in per capita income in the developing world, agriculture and food presents a very attractive long-term growth theme. There is really only one ETF in this sector – the Market Vectors Agribusiness ETF (MOO). This ETF fits all of our criteria for an attractive investment vehicle and we therefore choose MOO as our pick for the group. There are two other ETFs in this sector but they have negligible assets under management and therefore we will not discuss them in detail:
MOO – Van Eck Market Vectors Agribusiness ETF (web site link) – MOO, launched in August 2007, has a large $2.2 billion in assets under management. MOO holds 46 stocks with the following weights on agricultural sub-sectors: 42.3% in agricultural chemicals, 30.5% in agriproduct operations, 15.7% in agricultural equipment, 8.9% in livestock operations, and 2.6% in ethanol/biodiesel. The fund holds global stocks that are listed around the world. The five largest holdings are Deere (DE US) with a weight of 8.22%, Wilmar (WIL SP) at 7.64%, Potash Corp of Saskatchewan (POT US) at 7.62%, The Mosaic Corp (MOS US) at 7.43%, and Monsanto (MON US) at 6.70%. The fund has a relatively low net expense fee of 0.56%. Figure 3 illustrates that MOO has outperformed is broader relative HAP (which includes not only agriculture but also energy and metals/mining) due to the sharp rally in grain and soybean prices.Figure 3: HAP-Van Eck Hard Assets Producers ETF vs MOO Van Eck Agriculture -Van Eck Hard Assets Producers ETF (live chart)
Timber is not generally considered to be an agricultural product, but it does involve harvesting a natural resource, so we will discuss this sector here. The Guggenheim Timber ETF (CUT) is the only real contender in this category and CUT is our pick for the sector since it meets all of our criteria for an attractive ETF product. Barclays offers the WOOD-iShares S&P Global Timber & Forestry Index Fund (web site link) but that ETF has less than $1 million in assets under management and therefore is not a serious contender as an investment choice at this point.
CUT - Guggenheim Timber ETF (web site link) – CUT, launched in November 2007, currently has $122 million in assets under management. The fund tracks the Beacon Global Timber Index, which tracks the performance of common stocks of global timber companies. The fund currently holds 27 stocks with an average market capitalization of $3.2 billion. The fund’s top five holdings and weights are as follows: UPM-Kymmene OYJ (UPM1V FH) at 4.79%, Stora Enso OYJ (STERV FH) at 4.79%, Homen AB (HOLMB SS) at 4.65%, and Weyerhaeuser Co (WY US) at 4.62%. The top five country weights are as follows: U.S. at 30.47%, Japan at 17.36%, Finland at 9.77%, Sweden at 9.32%, and Canada at 8.64%. The fund has an expense fee of 0.65%.
From the Barchart.com ETF Research Team