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ETF Specialist

Balanced Exposure to the Natural-Resources Sector

While this natural-resources ETF isn't for the faint of heart, it can offer good diversification benefits.

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An investment in natural-resources commodities can offer good diversification benefits and a partial hedge against inflation (1). Because it is difficult to store most commodities (aside from precious metals), most commodity-oriented funds either invest in commodity futures or in the stock of companies whose businesses are tied to commodity prices. There is a trade-off between the two approaches. Commodity futures are more highly (though not perfectly) correlated with commodity prices than natural-resources stocks. But they introduce roll-yield risk, where some slippage could occur if an expiring contract has a lower price than the contract replacing it. And funds that invest in commodity futures tend to be more expensive and less tax-efficient than those that invest in natural-resources stocks.  SPDR S&P Global Natural Resources ETF (GNR) is one of the better options in the latter group.

This index fund invests in the world's 90 largest stocks in the energy, agriculture, and metals and mining sectors. In order to better diversify the portfolio, the fund assigns equal weightings to each of the three sectors. This prevents it from tilting heavily toward energy stocks, which would receive larger representation in a market-cap-weighted portfolio. Its holdings' revenue and performance are tied to the prices of the commodities that they or their customers sell. Because these commodities are cost drivers for companies in many other industries, their prices have relatively low correlation with the broad stock market. However, the fund is more highly correlated with the market than funds that invest in commodity futures.

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Alex Bryan does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.