A Risk On ETF for a Risk Off World

Broadly speaking, U.S.-focused materials ETFs have not been bad this year. On the other hand, the sector, by wide margins, trails consumer discretionary, financial services, health care and others. Retrenchment in emerging markets equities has pressured global materials ETFs, but some of those funds may offer tactical opportunity to strategy savvy investors.

“Investors have favored equities to fixed income on a basis of $9 to $1 in terms of inflows this year,” said Northern Trust Managing Director Shundrawn Thomas in an interview with ETF Trends at the Morningstar ETF Invest in Chicago. “People are under-allocated to commodities.”

The FlexShares Morningstar Global Upstream Natural Resources Index Fund (NYSEArca: GUNR) is one commodities ETFs with global exposure that has held up relatively well. Year-to-date, GUNR is down 5%, but over the past 90 days, the fund has jumped 7.7%, indicating some investors are starting to take advantage of compelling valuations in global materials shares. [A Unique ETF for Natural Resources Demand]

“U.S. stocks have risen in valuation relative to developed or emerging markets,” said Thomas. Thomas noted that as risk came off the table in the middle of this year, GUNR did languish a bit. However, the fund has been a solid performer in legitimate risk on environments such as last year or in the first quarter of 2013.

GUNR caps its U.S. exposure. The U.K. and Canada combine for almost a third of the ETF’s weight. That is important to because energy stocks combine for 34 percent of the fund’s sub-sector weight and global energy names, as Thomas pointed, sport more attractive valuations than their U.S. counterparts like Dow components Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX).

“If you can be patient, I like the idea of increasing incremental risk to a strategy like GUNR,” said Thomas. “The current environment is one of the more risk-less risk on trades. Risk hasn’t left U.S. borders, but investors are underweight real assets.”