If you’re a long-term commodity bull — like me — you’ve spent much of the last year licking your wounds. That’s because firms that produce the building blocks of modern society have been on a straight shot downward since the beginning of the year.
In fact, commodity stocks were the worst-performing S&P 500 group during the first six months of the year and have lagged behind the equity benchmark by the biggest gap in 15 years.
Much of the underperformance can be attributed to the slowing economic growth concerns from key demand drivers like China and India. As these two nations have stalled, the prices of everything from copper to corn have taken a downward turn. The strong rally in the U.S. dollar as well as the recent government shutdown and potential debt default isn’t helping matters either.
Yet, there could be reasons for commodities investors to get excited.
Shares of the miners, energy producers, chemical manufacturers and other commodity firms are now sitting at tantalizing bargains relative to the broader market. According to earnings estimates compiled by Bloomberg, the natural resources sector will increase earnings by more than 18% in 2014. That compares to just an 11% gain for the S&P.
Meanwhile, commodity firms currently trade for cheaper multiples than the index. For investors, the time could be at hand to buy a broad swath of the raw materials players before it’s too late to miss out on these bargains.
SPDR S&P Global Natural Resources ETF
Offering one of the best “one-stop-shops” for broad commodity producer exposure, the SPDR S&P Global Natural Resources (GNR) should be on investors’ lists. The ETF’s underlying index tracks 90 of the largest U.S. and foreign companies in the materials businesses. GNR is weighted so that investors get a balanced approach to commodity investing as the fund has one-third of its portfolio in each of the three main hard asset categories — energy, agriculture and metals & mining.
This provides exposure to everything from forest and paper products producers to gold miners and oil refiners.
So far, the ETF has been flat since its inception in 2010. But GNR does pay a nice 2.5% yield — so at least investors are being paid to wait. And given the sector’s cheap valuation and the potential to outperform next year, investors may not have to wait very long.
Expenses for the SPDR S&P Global Natural Resources run at just 0.40% — or $40 per $10,000 invested.
iShares MSCI Global Select Metals & Mining Producers
One of the biggest bargains and subsequent winners could be the iShares MSCI Global Select Metals & Mining Producers (PICK). Since the major selloff that began in 2011, metals producers in the S&P 500 have lost more than half of their market value. This drop has been exacerbated by the recent plunges in copper and gold prices.
For example, world’s largest copper producer Freeport-McMoRan Copper & Gold (FCX) has seen its P/E plunge about 22% percent since the beginning of 2010 and now sits at 12.8.
Yet the long-term picture remains a lot more promising for the mining industry as the emerging world continues to industrialize. At the same time, growth in the U.S. is continuing to grind forward — all of which will support earnings and dividends from the metals miners.
Which is why the PICK could be a good choice. The ETF tracks 262 global mining and metals producers — with the U.K., Australian and the U.S. firms rounding out the top three holding countries. PICK charges a rock-bottom expense ratio of just 0.39%.
IQ Global Resources ETF
The IQ Global Resources ETF (GRES) is an odd-ball ETF that generally gets zero attention form investors. However, that’s a real shame as the small fund has managed to be quite good in the performance category.
That’s because GRES uses a unique strategy to track commodities.
The ETF provides exposure to a basket of 151 hard asset producers — via a propriety Index IQ benchmark. The interesting part is that GRES then shorts the S&P 500 and MSCI EAFE indices. This isolates the return generated through movements in commodity prices. In essence, you get a product that tracks commodity futures, but it uses stocks to do so. This eliminates the hassle of dealing with a K-1 statement come tax time.
The fund’s strategy has also managed to outperform other futures-based ETFs in its lifespan.
GRES is up about 4.53% since 2009. Expenses run just 0.77% for the unique fund.
Vanguard Materials ETF/ Vanguard Energy ETF
Over the long haul, expenses matter. Paying too much in fees and hidden costs can wreak havoc on a portfolio and weaken overall returns. To that end, the Vanguard Materials ETF (VAW) helps put high fees to rest.
Leave it to the indexing wizards in Malvern to run a materials fund at just 0.14% in expenses. That’s nearly 84% less than its peers’ average.
For those low costs, investors are getting a pretty good portfolio of stocks. VAW tracks the MSCI US Investable Market Materials 25/50 and provides exposure to 134 different chemicals, construction materials, glass, paper, forest products, and metals producers. The only thing that’s missing is exposure to energy firms — which can be bought via the Vanguard Energy ETF (VDE).
Both funds have managed to rack up big performance numbers since their inceptions and could form a great low-cost backbone to a materials portfolio.
PowerShares Water Resources
Agriculture? Check. Metals? Got it. Oil? Yep, in there too. But what about water? The one natural resource that’s generally missing from many of the broader-based funds is exposure to the world’s most vital commodity — good old H2O.
Despite the fact that much of the world’s surface is covered by water, only about 3% of that is fresh, and the bulk of it is trapped as ice. That’s a huge problem, considering water demand continues to grow unabated as the global population rises exponentially. Analysts estimate that the world will see potable water futures contracts trading on worldwide exchanges in the near future.
Yet, even with the bullish long-term picture, many investors have zero exposure to the commodity. Which is why the PowerShares Water Resources (PHO) could be a great hard asset bet.
The fund is the largest in the sector and tracks 29 different companies associated with the water industry. These include filter and purifying companies, water utilities, and water specific equipment makers. The fund has also been blue gold for investors, outperforming the S&P 500 over the last year and annually since inception in 2005.
Expenses for PHO run 0.62%.
As of this writing, Aaron Levitt was long GNR.