by Aaron Levitt | February 22, 2012 11:32 am
Commodities have surged in popularity during the past few years thanks to a number of factors, including emerging market growth, inflationary pressures and monetary easing programs. To capitalize, a variety of exchange-traded fund issuers have created a vast array of products that track hard-asset producers, futures pricing and commodity-based strategies.
Asset manager BlackRock (NYSE:BLK[1]), through its iShares subsidiary, recently introduced a suite of five targeted commodity equities funds. While the new ETFs certainly have some appeal, they score low on innovation factor — and a number of existing funds might be a better bet.
iShares’ latest product roll-out gives investors indirect exposure to natural resources through shares of firms that engaged in the exploration, production and sale of various commodities. Hard-asset producers are seen as a leveraged way to profit off commodity pricing and growing demand. The new products from iShares include funds that track energy producers, agriculture related firms and metals/mining companies. They follow indices created by MSCI Inc. (NYSE:MSCI[2]), and will charge 39 basis points in expenses. They are:
“Through these new funds, investors can implement an equity-based solution for achieving highly targeted exposure to appealing commodity sectors, complementing or even replacing physically-backed or futures-based commodities approaches,” said[8] Darek Wojnar, head of U.S. iShares Product Development and Management.
That targeted exposure is true; however, iShares isn’t bringing anything new to the table. Many of these funds already exist in some form or another run by other asset managers.
For example, VEGI tracks a basket of firms related to agribusiness, including fertilizer and chemical companies, farm machinery manufacturers and food/meat packagers. Top holdings[9] for the new ETF include GMO seed firm Monsanto (NYSE:MON[10]), fertilizer giant Potash Corp. of Saskatchewan (NYSE:POT[11]) and tractor manufacturer Deere & Co. (NYSE:DE[12]). Top country weightings include the United States (41%), Canada (14%), Switzerland (7%) and Singapore (4%).
However, that’s nearly identical[13] to the Market Vectors Agribusiness ETF (NYSE:MOO[14]). The Van Eck-sponsored fund debuted in 2007 and has racked up an impressive $6.1 billion in assets. While the iShares fund does offer exposure to an extra 100 ag firms and beats MOO on expenses, the Van Eck ETF certainly has liquidity on its side, trading 750,000 shares daily.
While it might be unfair to pick on a brand-new fund on the liquidity front, the PowerShares Global Agriculture (NASDAQ:PAGG[15]) fund was unveiled in 2008, yet still only trades around 10,000 shares daily. VEGI certainly will have an uphill climb.
The remaining new ETFs in the iShares launch also are a bit of a conundrum. Both the new RING and SVLP funds include Peruvian gold mining giant Compania de Minas Buenaventura SA (NYSE:BVN[16]) in their top 10 holdings. The silver fund actually includes a 24% weighting toward gold miners[17]. While many gold mining firms also provide copper and silver exposure, the funds aren’t necessarily a “pure play” on their respective metals, as a number of the components generate significant revenue from various other metals.
Finally, the most peculiar fund in the launch is the FILL. The ETF offers exposure to the global energy sector by targeting exploration and production companies[18]. The underlying MSCI index excludes companies that derive their revenues primarily from marketing, storage or transportation of oil and gas, as well as alternative fuel companies. That results in a 65% weighting toward integrated oil & gas firms and a 27% weighting toward the E&P sector. The remaining 8% is divided between refiners and coal miners.
In this instance, iShares seems to be cannibalizing on its own funds. The iShares S&P Global Energy Sector (NYSE:IXC[19]) fund tracks a very similar, albeit more concentrated, basket of global energy firms, including a 10% weight to the oil service industry[20]. iShares even offers a straight E&P fund in the Dow Jones US Oil E&P Index (NYSE:IEO[21]). For investors, the $1.2 billion Global Energy or $400 million E&P fund might be better bets on growing global energy demand.
Overall, iShares’ recent suite of new commodity ETFs could find their way into a variety of portfolios. They certainly are some of the cheapest options out there. But considering plenty of funds that tackle very similar indices and themes already exist, the new batch might not find their footing with investors. Those looking to add commodity producer exposure might want to target already established funds.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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