Equity-Based Commodities: Better Than Futures?

October 29, 2009

 

HAP Vs. CRBQ

Market Vectors RVE Hard Assets Producers ETF (NYSEArca: HAP), which is one of the few equities-based commodities fund to provide global exposure to commodities through investments in producers and distributors, has seen assets cross the $100-million mark this month amid returns of some 33 percent year-to-date.

Once the sole global exposure provider, the fund now faces competition from another newcomer: the recently launched Thomson Reuters/Jefferies CRB Global Commodity Equity Index Fund (NYSEArca: CRBQ).

Like HAP, CRBQ also provides global exposure to commodities producers through a portfolio comprising 147 stocks. HAP has nearly 300 stocks.

Both funds are similar in construction, holding only stocks of companies that derive at least 50 percent of gross revenues from the production of commodities.

They provide similar global exposure, with a heavy focus on U.S. and Canada, and relatively similar sector weights.

 

Sector Allocations As Of September:

 

 

HAP

CRBQ

Energy

41%

39%

Agriculture

30%

38%

Base/Industrial Metals

13%

14%

Precious Metals

7%

9%

Alternatives

4%

N/A

Paper & Forest Products

4%

N/A

 

 

 

Top-10 Country Breakdown As Of September:

 

HAP

CRBQ

U.S.

39%

37%

Canada

13%

14%

Great Britain

7%

8%

Russia

6%

6%

Switzerland

4%

5%

Australia

4%

2%

France

3%

2%

Brazil

3%

3%

Japan

2%

N/A

South Africa

2%

2%

Netherlands

N/A

2%

 

One difference is that HAP provides an allocation to renewable resources that CRBQ doesn’t.

“That’s a very forward-looking component of the index,” Lopez said.

According to Lopez, the “global growth story” will be led by emerging markets, and the region has a lot of infrastructure work to do in the renewable resources arena.

Others might argue that renewable resources detract from the broader focus of the portfolios, which is to invest in the commodities that people use every day. The flip side of HAP’s allocation to renewable resources is a much lower weight in agricultural firms compared with CRBQ.

This week, the two now have a third competitor to face, which brings to the table a new twist: GRES.

IndexIQ’s newest launch, the IQ ARB Global Resources ETF (NYSEArca: GRES) bills itself as the first global resources hedged ETF.

GRES differs from its competing funds in a number of ways. For starters, it has a much lower allocation to energy: just 9.6 percent compared with approximately 40 percent for HAP and CRBQ.

The bigger difference, however, is that GRES takes on short positions in the S&P 500 and MSCI EAFE indexes in an attempt to limit the influence of market returns on the portfolio. By doing so, it aims to tighten the correlation between the fund’s return and the return of the spot commodities market. The gambit should limit the volatility of the fund, and may boost correlations, but it will also limit the fund’s upside.

The Big Picture

Year-to-date, commodities exchange-traded products have attracted nearly 40 percent of the total net inflow of investment in the ETF space?more than $21 billion?second only to taxable-bond ETFs, according to Morningstar.

That’s a significant jump from 2008 levels, when the asset class represented less than 9 percent of the total investment pie.

“Commodities are in the middle of a secular bull rally,” Lopez said. “After a sharp correction in 2008, we now have values back to 2003 levels. We see this is a great buying opportunity moving forward.”

And while the biggest players in the commodities space are the futures-based commodities products, equities-based commodities vehicles are gaining a following.

Year-to-date, equities-based offerings have accounted for 5.84 percent of all net investment inflow, more than twice as much the levels seen last year, according to Morningstar.

“In certain macro environments, commodity-linked equities may outperform commodity futures as a proxy for actual exposure to the spot prices of commodities,” said De Chiara, while noting that in other markets, the reverse may be the case.

“Just as investors look to commodities to diversify their overall portfolios, it may make sense to diversify commodity exposure itself by utilizing a multi-tiered approach that includes both commodity equities and futures,” De Chiara added.

 

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