Energy was the worst-performing sector in the S&P 500 last year, but it still notched a double-digit gain and is the most undervalued group relative to the broader market, prompting some investors to give the sector another look in 2020.
One way investors can wade back into energy equities without a full commitment to the sector is with the FlexShares Morningstar Global Upstream Natural Resource Index Fund (NYSEArca: GUNR).
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, is a part of the risk management theme.
A recent survey of institutional investors by IHS Markit explores why some market participants retreated from energy equities last year and while GUNR could be an avenue for investors of all stripes to revisit the group.
“The investors identify commodity price volatility, low return on invested capital and long-term supply-demand imbalances as the main factors that lead to investment underperformance historically,” according to IHS Markit.
The GUNR Approach
GUNR specifically identifies upstream natural resources equities based on a Morningstar industry classification system, with a balanced exposure to three traditional natural resource sectors, including agriculture, energy, and metals.
There are some bright spots to consider in the energy patch to consider, including strong balance sheets and capital returns to shareholders. GUNR has a trailing 12-month dividend yield of 3.32%.
“Still, 67% of respondents believe that there is potential for the industry to experience a cyclical reversion in the stock market and come back into favor with equity investors,” said IHS Markit. “They believe that rotation back into the energy sector is contingent on the supply-demand balance, conservative capital strategies and an improving outlook for the global macro and trade tensions.”
While GUNR’s exposure to energy and materials stocks – the ETF’s two largest sector weights – would seem to be problematic at a time of increased interest in sustainable investing, the opposite could prove accurate over time.
“Still, challenging as these issues on politics, regulation, investment and technology might be, investors see potential rising value in oil and gas and renewed interest in the industry. Under any assumption, the world will continue to demand fossil fuels for decades,” according to IHS Markit.
For more on multi-asset strategies, please visit our Multi-Asset Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.