The popularity of the resources theme is creating more viable ETF choices.
High-yield and low-volatility funds attract all the attention, but gobs of net new money has flowed into natural resources ETFs in 2012, lifting total ETF assets focused on the theme to more than $3 billion.
Themes like natural resources hold appeal as a twist on sector investing. They rely on top-down macro views like sector funds, but they bring their own investment thesis to the table. In other words, they’re not just building blocks for investors to fit into their own macro views.
The investment thesis for natural resources is a mix of indirect commodity exposure, inflation hedging and price appreciation, all underpinned by exposure to long-term global demand for the raw materials necessary to meet the end needs of a growing world population.
The funds use equity exposure to commodities rather than more direct exposure in the name of simplicity. After all, getting exposure with futures or by holding physical commodities leads to complexities like contango from futures curves and K-1 tax forms that commodity pool structures require.
The trade-off is generally weaker correlation to commodity prices—the difference between spot gold prices and gold miner stocks being one of the most obvious examples.
Broad commodities this year have given investors a wild ride without much to show for it. Recent reports of oversupply may have some investors questioning whether a natural resources play makes sense now. But some savvy commodity players buy on the dip, and the natural resources play I’m talking about here is a long-term one.
Fund issuers can doubtless make a more compelling case for natural resources than I have here. Indeed, asset flows into the space suggests they’ve done just that, and that investors are buying the pitch.
Theme And Variation
Here’s a list of the top four ETFs in the space by assets under management, with a column for year-to-date 2012 net asset flows