Investors can diversify their portfolios with exchange traded funds that target natural resources to diminish potential volatility associated with any single market sector or area.
On the recent webcast, Riding the Falls in a Barrel: Mixing Oil and Water in a Portfolio, Mark D. Carlson, Senior Investment Strategist for Northern Trust Asset Management, explains how allocations to energy and water resources can help an investment portfolio by providing an intermediate to long-term hedge against inflation, capital appreciation through growth and income generation through dividends.
In the current environment, market observers have been focusing on the swings in the oil market. Carlson points out that while prices are depressed, American producers are still pumping out more oil.
For instance, a state-mandated time limit on drilling and major oil-tax incentive in North Dakota’s Bakken oil could fuel a production spike in the region. Meanwhile, oil demand remains relatively flat after seeing an average one-and-a-half percent growth rate from 1995 through the end of 2013.
“We believe investors seeking a long-term, strategic allocation to energy would be wise to consider alternatives to concentrated energy exposure,” Mark D. Carlson, CFA Senior Investment Strategist FlexShares ETFs, said in a research note. “Many of the investment benefits of energy may be achievable through investing in a diversified selection of natural resources equities, which could provide reasonably correlated returns to energy price movements while potentially limiting return volatility. Balanced exposure to natural resources can provide all the energy-related exposure investors normally require in their portfolios.”
Investors and advisors who want exposure in the energy sector but are wary about further volatility can utilize a diversified natural resource ETF to capture a broad group of resource companies.
“The feedback we have received from advisors is that they have been struggling to piece together an efficient lineup of products for their exposure to alternatives or real assets,” Michael Natale, National Sales Desk Manager for Northern Trust Asset Management, said. “This is where a balanced approach like GUNR can help.”
The FlexShares Morningstar Global Upstream Natural Resource Index Fund (NYSEArca: GUNR) provides exposure to the rising demand for natural resources and tracks global companies in the energy, metals and agriculture sectors, while maintaining a core exposure to the timberlands and water resources sectors. Specifically, GUNR includes 32.2% energy, 29.6% agriculture, 27.9% metal, 4.9% Timber and 4.8% water.
Moreover, some are beginning to think about the potential consequences of droughts, notably the conditions in California, and potential benefits of water investments. The fundamentals look promising as a growing global population tries to tap into a small supply.
Carlson points out that the world population is growing by 80 million people per year and the global population could exceed 9.1 billion by 2050. Meanwhile, only 2.5% of the world’s water supply is freshwater, and a large chunk is stuck in glaciers and ice, which makes the total liquid freshwater supply closer to 1.6%.
“For many investors, a strategic, balanced allocation to a diverse collection of natural resources can potentially provide all the energy exposure needed for strategic allocations and provide exposure to one of the hottest areas of natural resources – water,” Carlson added.
Financial advisors who are interested in learning more about the natural resources can listen to the webcast here on demand.