Oil prices closed higher for a second consecutive week last week and if that theme has some legs, ETFs such as the FlexShares Morningstar Global Upstream Natural Resource Index Fund (NYSEArca: GUNR).
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.
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.
The energy market continues to tackle a supply-side glut. For instance, a fleet of tankers full of Saudi Arabian oil is moving toward the U.S. Gulf Coast, potentially inundating a market already saturated with oil, the Wall Street Journal reports. The tankers were already loaded back in March and early April when Saudi Arabia shifted to a strategy of increased output during its recent tussle with Russia.
GUNR Could Shine
Natural resources cover energy, metals, agriculture, timber, and water. They provide exposure to the basic economic building blocks, capitalize on supply and demand dynamics, and benefit from short- and long-term inflation drivers. Global populations and living standards are increasing, driving up the collective demand for goods. Additionally, we see that there is a widespread need for global infrastructure development and repair, which require natural resource consumption.
Meanwhile, on the demand side, observers are warning of a severe disconnect. According to the Organization of Petroleum Exporting Countries, global oil demand will plunge by 6.8 million barrels a day in 2020, with the worst of the contraction of 20 million barrels per day in April as a result of travel bans and lockdowns aimed at containing the coronavirus, according to the Wall Street Journal.
GUNR takes an “upstream” focus that targets companies with ownership or direct access to the raw materials. These natural resource companies have revenues, earnings, cash flows, and valuations that are closely linked to natural resources. The upstream focus provides improved correlation to commodity futures compared to downstream operations, granting investments greater inflation protection.
GUNR, which yields 4.42%, is higher by more than 7% over the past month.
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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.