The Case for an Equity-Based Approach to Commodities Investing | ETF Trends

Real assets are a great way to augment a 60/40 portfolio during times of inflation, but they are also favorable as a long-term play to provide diversified risk exposures in all economic environments.

Investors can find benefits in equity-based real assets as well as a futures-based approach; however, one strategy has a clear advantage.

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 wrote. “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.”

Especially for investors looking at strategically investing over a longer time period, the equities are typically a better fit.

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).

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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