Get Balanced Natural-Resources Exposure With This ETF

Alex Bryan: Despite their volatility, stocks linked to natural resources can offer some good diversification benefits. Natural resources are key cost drivers for firms in many industries. In contrast, companies linked to natural resources tend to become more profitable as commodity prices rise either through direct sales or indirectly through increased demand from their customers who are engaged in commodity production.

SPDR S&P Global Natural Resources ETF (GNR) offers a good way to get exposure to these types of companies. It invests in the world's 90 largest companies operating in the energy, agriculture, and metals and mining sectors. In order to improve diversification, the fund assigns equal weightings to each of these three sectors. And that's a notable improvement over some of its market-cap weighted peers, which tend to make very heavy bets on the energy sector.

While weak demand can depress commodity prices across the board, the fund's balanced portfolio should help reduce volatility. It does, however, still carry a fair amount of risk: Commodity prices tend to be volatile to begin with and many of the fund's holdings have significant operating leverage, which can amplify the effect of fluctuating commodity prices on their profitability.

Adding to this risk, few of the fund's holdings enjoy wide economic moats. Investors in this fund are not only betting on high commodity prices but also that the fund's holdings would be able to keep their costs down. Therefore, its performance will not directly correlate with that of commodity prices.

However, this fund offers some advantages over alternatives that invest directly in commodities futures, including better tax efficiency, a lower expense ratio, and exposure to the equity risk premium. At the end of August, the fund's holdings were trading at lower multiples of book value and forward earnings than those in the S&P Global 1200 Index. Reasonable valuations and attractive diversification benefits could make this an interesting option for investors with high risk tolerance.