Imitation just may be the sincerest form of flattery, as any sufficiently profitable ETF idea seems to eventually attract clones. Competition is usually a good thing for investors, as it can drive expenses lower and incentivize fund sponsors and managers to deliver better and better service to investors. At the same time, though, competition can create confusion, so it is helpful to look at similar ETFs on a head-to-head basis to highlight the significant differences between them .
In this article, we investigate theS&P North American Natural Resources Index ETF and theMorningstar Global Upstream Natural Resources Index Fund . As the names suggest, these are both funds devoted to natural resource investments, and both ETFs hold the common shares of a variety of commodity producers across the energy, metals and agriculture sub-sectors .
The IGE fund is issued by iShares and tracks the S&P North American Natural Resources Sector Index, a modified cap-weighted index that incorporates stocks from the energy and materials sectors, while specifically excluding chemicals and steel companies. This fund was launched in October of 2001.
The GUNR fund tracks Morningstar's Global Upstream Natural Resources Index, a global index that includes stocks engaged in "upstream" production activities in energy, metals, agriculture, timber and water. Stocks are selected on the basis of the largest float-adjusted market capitalizations, with 30 stocks from energy, metals and agriculture, and 15 stocks from timber and water included. Emerging market exposure is limited to 20% and U.S. exposure is around to 40%. This fund was launched in September of 2011 .
Appeal and Best Fit
Natural resource holdings can appeal to a variety of investors. Conservative investors can look to natural resource stocks as a hedge against inflation, as resource stocks do tend to outperform in periods of rising prices. At the same time, these stocks can be volatile, and aggressive investors can attempt to time the sector and use these funds for speculative allocations to the resources sector.
Under the Hood
Given the different inclusion criteria for the two funds, it's not surprising that the holdings are significantly different .
Both funds hold a roughly similar number of positions, with the IGE fund holding a slightly higher percentage of assets in its top 10 holdings (though both are below 50%). Energy holdings are more than three-quarters of the IGE fund, while GUNR holds about 30% of its assets in energy (most of which is in large integrated oil/gas companies). Roughly one-quarter of IGE's energy holdings are in equipment and service companies.
Metals and mineral companies are less than 20% of IGE holdings, with a handful of additional small positions. GUNR's holdings are more diverse - nearly one-quarter of the fund's holdings are in agricultural equities (split between chemicals and other agriculture products), while metals/minerals and gold are roughly 20% and 10%, respectively. Smaller allocations are made to other precious metals, water and paper/timber-related investments .
The geographical allocations are also quite different. IGE's holdings are almost exclusively based in North America, while about 60% of GUNR's holdings are in North America, with sizable allocations to companies headquartered in the United Kingdom, Australia or Switzerland.
In summary, IGE is a much more focused ETF, as its holdings are highly concentrated in the North American energy sector. While IGE is more than twice the size of GUNR in terms of assets under management, the volumes are similar and both are sufficiently liquid for retail investors.
Expenses and Performance
Both funds have identical 0.48% expense ratios, and neither are available on a commission-free basis. Within the broadly-defined "Materials ETFs" group of ETFdb.com, these expense ratios fall in the lower end of the range of 0.14% to 0.95%, with the median expense ratio of 0.65%.
GUNR's short operating history significantly hampers a comparison of performance and volatility. For the year 2012, GUNR was up just over 9% in price and 8.5% in NAV, while IGE was up a little less than 2% .
For 2011, IGE was down 8% after rising 23% in 2010 and 37% in 2009, and falling 43% in 2008. These returns compare with the flat performance of the larger natural resources group in 2012, a 21% decline in 2011, a 21% rise in 2010, a 55% rise in 2009 and a 46% decline in 2008.
Investors looking for broad ETF exposure to natural resources could also consider the following funds:
- Market Vectors Hard Assets Producers :A more diversified fund (over 300 holdings, with roughly one-third allocation to the top ten positions), with exposure to energy, metals/mining, agriculture, food and equipment. More than half of the fund's holdings are ex-U.S.
- Rogers Intl Commodity ETN :Structured as an ETN, RJI gives investors exposure to a commodity index created by noted commodities investor Jim Rogers. While this ETN is more expensive than most (a 0.75% expense ratio), it offers an uncommon mixed allocation to energy, minerals/metals, precious metals and agricultural commodities via futures.
The Bottom Line
While both of these funds look to offer upstream resource producer exposure, they end up being very different funds. IGE is virtually a North American energy fund with a metals/materials "kicker," while GUNR is much more diverse across energy, agriculture, metals/minerals, timber and water.
GUNR also incorporates a global outlook into its allocation, a key consideration given that so many metals/minerals and agriculture companies are domiciled outside North America. IGE's holdings suggest a significant correlation to the direction of energy prices, while GUNR's price and NAV could be subject to greater influence from currency moves and sovereign risk.
Disclosure: No positions at time of writing.