If you’re looking for a longer-term position in commodities, an equity-based ETF like this one is your best option, writes Abraham Bailin of Morningstar ETFInvestor.
Commodities and hard assets have been beneficiaries of the consistent demand for the diversification and inflation-hedging benefits that they provide. At the same time, fundamental drivers are poised to provide positive pressure in the long run.
While the proliferation of exchange traded products has afforded investors convenient exposure to the space, there are a number of ways to gain access to that exposure.
Most broad commodity offerings turn to futures contracts. Some, like the fund reviewed here, use equity securities.
There are benefits and downfalls to each. Futures-based offerings can provide very good short-term tracking of a target commodity. Those looking to benefit from a level of operational leverage and cash flow, however, may want to consider an equity-based offering.
Suitability
Market Vectors RVE Hard Assets Producers ETF (HAP) holds the most powerful names in the commodity-production space, and can be used as an alternative to futures-based broad commodity vehicles.
The equity securities that HAP holds do not suffer from roll-yield drag, a phenomenon that has plagued futures contract-based products in recent years.
Additionally, using equities to gain commodities exposure can introduce investors to levels of operational leverage that provide extra sensitivity to commodity price movements, under the right circumstances. These can be substantial advantages.
The Dow Jones UBS Commodity Total Return Index has rallied an impressive 54% since the market bottom in March 2009. Despite high volatility, HAP rallied 92% over the same period.
HAP allows investors to procure exposure to fundamental commodity-demand growth, though we caution investors to keep an eye on the offering’s market exposures. The portfolio has moved in lockstep with the S&P 500 over the past year, and purchasing HAP may serve to bolster established positions.
As we examine longer periods, however, HAP appears to maintain ever-higher correlations to emerging markets.
Portfolio Construction
Tracking the Rogers Van Eck Hard Assets Producers Index, HAP looks to invest no less than 80% of its assets in companies that derive more than 50% of their revenues from the production of commodities.
Furthermore, the fund will invest no less than 80% of assets in accordance with its index. The index holds roughly 340 securities across all six hard-asset sectors.
Sector weightings are determined by global annual consumption and rebalance quarterly. In line with their energy- and agriculture-heavy tilts, the US and Canada grab the largest national weightings within HAP’s portfolio.
Fees
HAP charges a fee of 0.59%, annually, putting it on the expensive side when compared with other hard-asset-specific ETFs.
But it’s a buy all the same.
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