GNR - GNR: Correction In Commodities Offers A New Buying Opportunity

• GNR invests in companies involved with natural resources across energy, materials, and agriculture.
• The fund has faced increasing levels of volatility with commodity prices under pressure amid new global growth concerns.
• We see value in the fund at the current level eyeing a compelling 5% dividend yield.

The SPDR S&P Global Natural Resources ETF ( GNR ) provides exposure to a diversified group of commodity-related stocks. This is a segment with a heightened profile amid headline-making global supply chain disruptions and persistently hot inflation levels which drove commodity prices to decade highs this year. While GNR was a big winner in Q1 and much of Q2, the fund has faced increasing volatility amid an ongoing correction lower in those same commodities.

The challenge here is new concerns over global growth and recessionary fears translating into a weaker outlook on the demand side. That being said, we see value in GNR at the current level as the fund is already down more than 25% from its high offering a dividend yield approaching 5%. We see GNR as well-positioned to rebound on a stabilizing macro outlook going forward.

What is the GNR ETF

The GNR ETF technically tracks a combination of three separate S&P Global Natural Resources Indexes across the Agriculture Index, Energy Index, and Metals and Mining Index. The result is that the fund ends up comprised of 90 of the largest publicly traded companies involved with natural resources through a modified market-cap weighting methodology where each sub-industry index is capped at one-third of the fund. Notably, GNR is global with non-U.S. companies representing 65% of the portfolio.

The idea here is that commodities like oil & gas, iron ore, steel, copper, gold fertilizer minerals, corn, wheat, and even lumber as a group represents real assets that follow similar high-level macro themes. The companies involved with the production and commercialization of these raw materials are often best positioned to benefit from rising prices over time.

Within the current portfolio, the largest holding is Nutrien Ltd ( NTR ) with a 6% weighting recognized as one of the world's largest potash and fertilizer producers capturing trends within agriculture. Down the line, major global integrated energy leaders are well represented including Shell lc ( SHEL ) and Exxon Mobil Corp. ( XOM ) each with a 5% weighting. On the metals & mining side, BHP Group Ltd ( BHP ), Vale SA ( VALE ), and Glencore plc ( OTCPK:GLCNF ) are within the top-10 positions of the fund.

GNR Performance

We mentioned that GNR has been volatile, down about 4.5% over the past year but trading in a wide range. Among the top holdings, energy sector stocks have outperformed including Chevron (CVX) and Exxon Mobil, both up 37% over the period. Miners like BHP and Vale are trading significantly lower.

There are many moving parts here. First, during the early stages of the pandemic boom in 2021, production disruptions globally hit supplies while demand recovered quickly last year. The result was a trend higher in most commodities that accelerated at the start of 2022. The Russia-Ukraine conflict further added to global trade bottlenecks creating imbalances and adding to momentum in most commodity prices. Natural resource stocks stood out as winners even as other sectors of the market sold off in Q1 and into Q2.

Fast forward, the more recent scenario has been a concern over global growth, particularly with most countries seeing record inflation. In the U.S., the series of Fed rate hikes have translated into particular strength in the U.S. dollar which now represents a headwind economic momentum in much of the world. The trend of declining growth expectations is evident with most commodities selling off sharply in the past month. Mixed signals from China, recognized as the world's largest commodity importer has also limited demand.

On the other hand, oil has been somewhat resilient with some measure of post-pandemic travel demand as a strong point supporting prices. Nevertheless, Brent Crude trading at just around $100 per barrel is a far cry from levels reached during the initial Russia invasion headlines when it briefly traded near $140.00. The softer global growth outlook is now the main headwind.

Putting it all together, GNR is down around 8% year-to-date which considers a deeper 20% selloff just over the past month. Again, a lot of this latest move reflects the correction in most commodity prices with related stocks selling off into the shifting macro environment. From the chart below, it's worth noting that even through the volatility, GNR has outperformed the Materials Select Sector SPDR ETF ( XLB ) and even the S&P 500 Trust ETF ( SPY ) both down around 19.5% year-to-date. The point here is to say that GNR has performed as expected, representing a mix between energy sector stocks and leading materials sector players.

GNR ETF Price Outlook

The action in natural resources has likely been frustrating to investors considering GNR is now trading near an 18-month low and back to levels from 2018. The silver lining of the correction is the sense that we get a new buying opportunity in a high-quality fund at a good price.

The bullish case from here is that global growth conditions can at least stabilize with the deep selloff already pricing in some of the worst-case scenarios. Beyond the macro headlines, tight supply and demand conditions for most commodities should limit the downside from here. There is still the possibility that commodity prices stage a sharp rebound and ultimately reclaim their recent highs. All it takes is one or two headlines of the Russia geopolitical conflict escalating and the bullish momentum can snap back quickly.

The way we are looking at GNR is that for most of the underlying holding, the current commodity pricing environment whether it be in oil & gas, metals, or even grains is still positive for most companies in terms of cash flow. With energy, oil at $100 a barrel may not be a bonanza but can still drive very strong earnings. We believe dividends from natural resources should remain elevated for the foreseeable future.

GNR currently has a listed dividend yield of 4.7% which is distributed through a semi-annual distribution with the next payment expected in December. The combination of high-yield payouts from a diversified portfolio adds a layer of quality to the fund. While it's difficult to estimate exactly what is the forward yield over the next year based on variable payouts, we estimate the yield can approach 5% considering the recent selloff in many of the underlying stock prices.

Final Thoughts

We are bullish on GNR at the current level and expect the fund to trade higher over the next year as commodity prices rebound with an improving global growth outlook. The main risk to watch would be a deeper deterioration of macro conditions. Sharply weaker trade activity with a confirmation of a structural recession could open the door for another leg lower.

The attraction of GNR is its ability to take that middle ground between energy, basic materials, and agriculture as a measure of diversification. Many other funds focus on a particular segment sector, so GNR is relatively unique with its passive exposure to "natural resources". The fund does a good job to capture high-level themes in commodities and can work as a long-term core holding in most investor portfolios.

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