When investors think of “real assets,” physical gold is often the first thing that comes to mind; however, there are alternative ways to gain commodity exposure that bring enhanced benefits to a portfolio.
Investors can find benefits in equity-based real assets, including natural resources, global real estate, and listed infrastructure. The three real asset asset classes can provide diversified risk exposures and, in some cases, inflation protection, according to FlexShares.
Natural resources, global real estate, and listed infrastructure all have equity market exposure. In addition, natural resources have emerging market equity and commodity exposure; real estate and listed infrastructure have term interest rate exposure, and real estate has credit exposure, according to FlexShares.
“Real assets is a great way to augment that 60/40 portfolio in a way to help yourself in the inflationary period,” Christopher Huemmer, senior investment strategist for FlexShares’ ETFs, said last week at Exchange: An ETF Experience.
An equity-based approach to natural resources has historically materially and persistently outperformed a futures-based approach to gaining commodity exposure. According to FlexShares, in every case between July 31, 2011, and December 31, 2020, the monthly projected five-year rolling returns of the Morningstar Global Upstream Natural Resources Index were higher than those of the Bloomberg Commodity Index.
“Driving this outperformance was the equity market exposure, but commodity prices still played a large part in the return expectation,” FlexShares writes. “The modest growth environment during the time frame — combined with OPEC-controlled supply — which steadily removed the oil glut of the prior decade also played a role. We believe that the continued rise of the Emerging market middle class should support commodity demand more broadly in the years ahead.”
Investors seeking enhanced diversification and potential inflation protection through an equity-based approach should look to the FlexShares Morningstar Global Upstream Natural Resources Index Fund (GUNR).
“If you’re looking at strategically investing over a longer time period, the equities make more sense to me for several reasons,” Huemmer said.
GUNR invests in global companies focused on the energy, metals, and agriculture sectors, while maintaining a core exposure to equities in timberlands and water resources sectors.
By allocating a dedicated exposure to timber and water resources, diversification within the natural resource space is increased, offering investors broad coverage of the upstream natural resource supply chain. The methodology behind GUNR prevents any one area in natural resources from dominating or skewing overall exposures and performance.
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