ETF Expert

I recently read a column where the portfolio prognosticator explained a penchant for natural resources. In the article, he explained that he wanted to cut back on traditional energy exposure (a.k.a. oil) in favor of other high-demand commodities.

Ostensibly, the individual desired a path for lowering the overall volatility that comes with the oil markets. His answer? The iShares Goldman Sachs Natural Resources Fund (IGE).

Now… I have all the fondness in the world for iShares and its driver, Barclays bank. This is the preeminent provider of ETFs on the planet.

Nevertheless, it’s important to look at what IGE has under the hood; specifically, all 10 of the top 10 holdings are oil companies a la Chevron, BP, Exxon, Schlumberger and Conoco. Nearly 70% of the sector weighting is, indeed, energy. So where are the other natural resources? Where’s the water, wood, minerals, coal, soil and power.

Proponents of the iShares Goldman Sachs Natural Resources Fund (IGE) might argue that there is an 11% weighting in materials and a spattering of other economic segments. Yet if IGE offered something that was genuinely different than the higher volume Select SPDR Energy Index (XLE), wouldn’t we see a bit of divergence in the movement of these funds? The fact is… there is virtually no divergence whatsoever.

When one is looking for a more balanced exposure to natural resource companies, he/she might want to look towards a new breed of diversified investing; that is, the same company that leads the world in ETF vehicles offers an exchange-traded note (ETN) that caps its energy exposure to 33%.

The iPath Dow Jones-AIG Commodity Total Return Index ETN (DJP) is not a fund of specific stocks, but rather a note that is backed by the corporate parent, Barclays Bank PLC. The bank promises to pay investors the return of the Dow-Jones AIG Commodity Index, minus its fee.

What we are talking about with DJP is a natural resource tracker with 18 different commodities in the bin. This is not a recommendation here… just a recognition that an investor looking for diversification in the natural resources arena need look somewhere other than XLE or IGE.

Disclosure statement: Some of Pacific Park’s investment clients may hold positions in any of the investments mentioned above.