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The Elusive Diversified Natural-Resources Fund

Finding a balanced equity natural-resources fund can be challenging.

Kevin McDevitt, CFA, 04/17/2014

A diversified equity natural-resources fund may seem like an oxymoron for a niche category, but there's a lot of ground to cover (no pun intended) in this segment. This makes it more difficult than you might think to find a truly diversified equity natural-resources offering. (Whether it's better to get commodity exposure directly or through equity in commodity companies is a separate discussion, one that we've touched on here.)

Part of the problem is that the market's definition of diversified probably doesn't match the average investor's. Most investors perhaps intuitively think of a natural-resources fund as being roughly balanced between energy and materials stocks (agricultural, metals and mining, and chemical companies) with perhaps some REITs and utilities sprinkled in.

But the standard index for this category, the S&P North American Natural Resources Index, is decidedly tilted toward energy. The iShares North American Natural Resources IGE exchange-traded fund, which tracks the index, has 85% of its portfolio in energy stocks and less than 15% in materials.

Naturally, this reflects the fact that the energy sector dwarfs materials as measured by market capitalization. The energy component of the S&P 500 Index has a whopping $1.7 trillion market cap, although nearly $800 billion of this comes from just three companies: oil and gas majors Exxon Mobil XOM and Chevron CVXand services outfit Schlumberger SLB.

Meanwhile, the entire materials weighting is less than $600 billion, the bulk of which is in chemical and agriculture companies such as Dow Chemical DOW and Monsanto MON. Metals and mining companies--especially gold miners such as Newmont Mining NEM--are in short supply. In fact, Newmont is the only gold miner in the S&P 500, and gold stocks are just 4.4% of the S&P North American Natural Resources Index, which hasn't benefited much from the 14% or so runup in gold miners so far in 2014, as it has gained just 0.8%. On the other hand, this modest exposure saved it from doom in 2013, as the average gold miner fell about 50% while the index gained a healthy 16.5%.

Where to Go for Full-Service Natural-Resources Exposure
Those looking for a wider sampling of commodity companies may want to consider ETFs SPDR S&P Global Natural Resources GNR and Market Vectors RVE Hard Assets Producers HAP. As its name implies, the S&P Global Natural Resources Index, which the ETF tracks, is more global than its North American-focused index counterpart. Two thirds of its holdings are domiciled outside of the United States. More importantly, it equally weights the agriculture, energy, and metals and mining subsectors, giving it among the broadest commodity exposure available.

One potential quibble with the S&P Global Natural Resources Index, though, is that 25% of its portfolio is in big integrated oil and gas companies such Exxon, TotalTOT, Chevron, BP BP, and Royal Dutch Shell RDS.A. These stocks are staples of the major global-equity indexes and investors likely already have exposure to such companies through their core holdings. The Market Vectors fund has a bit less, 18.1%, in such stocks, but Exxon, Chevron, Total, and BP are still among its top-10 holdings.

Open-end fund T. Rowe Price New Era PRNEX has just 11.5% of its portfolio in the integrated companies. The fund historically has been better diversified across the natural-resources segments than most peers, with just less than 60% of assets currently in energy stocks and about 25% in materials. Keep in mind, though, that the fund's skipper, Shawn Driscoll, just took over from Tim Parker in September 2013. It will take some time for Driscoll to establish his own record. That said, he's off to a fine start so far, with the fund generating a 9.8% gain versus 7.0% for its average natural-resources rival.

Kevin McDevitt is an Editorial Director with Morningstar.

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