With growing populations and increasing per-capita income, global markets are in the early stages of what is expected to be an extended period of demand expansion for energy, food products, metals and other natural resources such as paper and water. These are the building blocks of flourishing economies.
Investors can participate in the benefits of rising prices of raw input materials via exposure to natural resources. These investments offer the additional potential advantage of offsetting some of the longer-term inflationary effects of economic expansion in emerging and established regions.
Natural resources can generally be grouped into five categories, four of which are fairly well known plus one new category that is gaining importance with investors.
1. Energy: Most investors know this natural resource group well. Raw or “upstream” natural resources include crude oil and natural gas, and processed or “downstream” commodities include natural gas liquids, heating oil and gasoline.
2. Agricultural: These include grains such as corn and wheat, soybeans, livestock, and “soft” products such as coffee and cocoa.
3. Metals: Precious metals include gold, silver and platinum. In addition, industrial metals such as copper, nickel and aluminum provide the skeletal framework for an economy.
4. Forest: The forest is the ultimate renewable natural resource of timberlands used for building and paper products.
5. Water: The newest commodity to be regarded as an asset class is water. World population and wealth growth have fueled demand for food and potable water through water rights, delivery and treatment. A fundamental building block of life, water is attracting heightened attention due to shortages of potable supplies in many geographic areas, set against rising water demand from consumer, farming and industrial users.
A key consideration for investors is the distinction between the upstream and downstream components of the natural resource supply chain.
The upstream segment refers to the very beginning of the supply chain, where the resources are “in the ground.” These resources can be natural gas fields in Oklahoma, acres of forest in rural Florida, fields of soybeans in Brazil or an aquifer in Saudi Arabia. The value to investors in the upstream segment is the market or futures price of the resource less the costs over time to extract the resource, process and deliver it to the downstream segment of the supply chain.
In the downstream segment, the resource is processed into intermediate or finished goods for delivery into the commercial or consumer markets. Companies operating in the downstream segments, after having paid for the resource, face innumerable challenges in dealing with packaging, distribution, marketing, branding, changing consumer tastes and other factors that can impact their profitability and cash flows.
Ownership interests in upstream natural resources segments offer investors profitability benefits from natural resource price increases, while the same price increases have a negative impact on the downstream segment of the supply chain (i.e., the cost of goods sold increases and operating margins decrease for companies that are price takers on natural resource supplies).
A focused investment in the upstream segment of specific resource supply chains may help investors to optimize exposure to natural resources. The FlexShares Morningstar Global Upstream Natural Resources Index Fund (ticker: GUNR) has been designed to provide this exposure, using an insightful, rules-based methodology.
FlexShares Morningstar Global Upstream Natural Resources Index Fund is an ETF designed to give investors access to global equity securities with an emphasis on the upstream portion of the natural resources supply chain. It is a focused, convenient way for investors to participate in the rising global demand for natural resources, seeking to capture the favorable growth and price impacts of this trend.
The Fund invests in global companies focused in 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. This provides investors with broader coverage of the upstream natural resource supply chain. The Fund’s methodology seeks to prevent any one area in natural resources from dominating or skewing overall exposures and performance.
FlexShares Morningstar® Global Upstream Natural Resources Index Fund (GUNR) is passively managed and uses a representative sampling strategy to track its underlying index. Use of a representative sampling strategy creates tracking risk where the Fund’s performance could vary substantially from the performance of the underlying index along with the risk of high portfolio turnover. It is subject to the global natural resource industry. As the demand for or prices of natural resources increase, the Fund’s equity investment generally would be expected to also increase. Conversely, declines in demand for or prices of natural resources generally would be expected to cause declines in value of such equity securities. Such declines may occur quickly and without warning and may negatively impact your investment in the Fund. Investments in foreign market securities involve certain risks such as currency volatility, political and social instability and reduced market liquidity. To the extent that the Fund invests in Emerging markets, those investments may be subject to increased price volatility and may be more susceptible to adverse economic, market, political or regulatory occurrences affecting that country, market, industry, sector or asset class.
The Morningstar® Global Upstream Natural Resources Index is the intellectual property (including registered trademarks) of Morningstar® and/or its licensors (“Licensors”), which is used under license. The securities based on the Index are in no way sponsored, endorsed, sold or promoted by Morningstar® and its Licensors and neither of the Licensors shall have any liability with respect thereto.