NANR: A Solid Natural Resource Play (NYSEARCA:NANR)

Worried about inflation re-accelerating? The way to play that depends on the source. Let’s say China has bottomed and we start seeing some economic acceleration there. What likely happens to commodities? They probably run higher on a pickup of China demand. That’s cost-push inflation, and if that’s what is coming, then funds like the SPDR S&P® North American Natural Resources ETF (NYSEARCA:NANR) make sense as a way to hedge and benefit from it.

NANR is an exchange-traded fund that seeks to provide investment results that, before expenses, correspond to the price and yield performance of the S&P North American Natural Resources Index, which measures the performance of publicly traded US and Canadian companies in four distinct sub-industries within the natural resources and commodities sectors – energy, metals & mining, and agriculture. All of the index’s constituents can be traded on a US exchange. The index is rebalanced quarterly, with the weightings targeting energy at 45%, metals & mining at 35%, and agriculture at 20%. NANR gets you access to this at just a 0.35% fee.

Top Holdings

This is a bit of a top-heavy fund in terms of holdings, with the top 10 positions making up 63.66% of the fund. Freeport-McMoRan alone makes up over 10% as the number 1 position, balanced against Exxon Mobil in 2nd at 9.59%.

I normally don’t like to see concentration like this, but given the sector target weights and size of the companies overall, I don’t see this as too much of a problem.

The total number of holdings is just 33. One of the big pluses of this seemingly concentrated portfolio? Valuations are solid. The Price to Earnings ratio is 15.66, and the Price to Book ratio is 1.94. This isn’t an expensive fund, which should provide a bit of a cushion theoretically whenever a market correction takes place.

Peer Comparison: Evaluating Alternative Natural Resources ETFs

An investment in NANR should be evaluated against other exchange-traded funds that focus on natural resources, like the iShares North American Natural Resources ETF (IGE) and the VanEck Natural Resources ETF (HAP). IGE is far more skewed toward energy, with around 80 percent of its portfolio holdings in energy companies. That’s helped it do quite well in the past couple of years, as it’s been a top-performing sector. But it also makes the fund more volatile, and vulnerable to broad economic weakness down the road. HAP is more diversified, with holdings in energy, forestry and agriculture, mining, and water. This broader exposure can make for a more resilient portfolio.

When we look at the performance comparison, NANR has outperformed all of them. The mix has worked.

The Pros and Cons of Investing in Natural Resources

The natural resources sector brings with it a special set of opportunities and challenges for investors. On the plus side, the sector serves as a useful inflation hedge in that commodity prices have tended to rise in most inflationary regimes, with higher prices today than in the past (although not quite enough in the aggregate to offset the effects of inflation). Moreover, many natural resources are inherently scarce, and rising demand for them around the world is likely to be a permanent feature.

But natural-resource investing also involves serious risks, as the sector is particularly cyclical. The resource sector is also often extremely capital-intensive and, due to large upfront investment requirements, heavily exposed to further interest rate hikes and a tightening of credit conditions. These factors all play a part to suggest that the sector might have some difficult times ahead, as the shift to renewable energy trends are likely to continue. Likewise, the possibility of stricter environmental regulations on fossil-fuel miners in the future is also long-term negative for the traditional energy and mining sector.

Conclusion

NANR offers a less volatile way to gain exposure to the space, since it provides broad-based, balanced exposure to the natural resource sector. Tweaked to include a mix of energy, metals & mining, and agriculture, the fund overall is solid in its construction and has the performance to back it up. Worth considering in your portfolio.

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