GNR - GNR: Large-Cap Investing Supported By Big Growth Sectors

Summary

• GNR is an ETF that tracks the performance of the S&P Global Natural Resources Index, specifically agriculture, energy, and metals & mining.
• The high demand energy sector and remarkable performance of the high-yielding largest-cap companies make GNR an attractive choice.
• GNR’s global diversification and positive future outlook, backed by good returns and high yields have me rate this ETF buy at present.

One of State Street’s SPDR Index Shares Funds that I liked the most is the SPDR S&P Global Natural Resources ETF ( GNR ). The conceptualization of this fund is intriguing, and I am impressed by its rigorous yet concise selection criteria that allow the ETF to seize potential opportunities while safeguarding itself from any possible downsides. This ETF has a robust construction and potential growth prospects as well as a supportive quantitative analysis. The current scenario combined with my optimism about its future lead me to rate GNR a Buy for now.

Strategy

GNR is an index fund backed by State Street Global Advisors that tracks the performance of the S&P Global Natural Resources Index by following a representative sampling technique. In other words, the fund can invest in a subset of the companies from the index that best represent the characteristics of the index itself. This means that the holdings in the fund could be fewer than the number of companies in the underlying index. Alternatively, the fund may invest in an equal or even greater number of securities than that of the index.

The components of GNR are three sub-indices: t agriculture index, the energy index, and the metals and mining index. Components of each sub-index comprise one-third of GNR giving equal distribution to all three.

Holding Analysis

GNR has 121 Holdings (out of which 101 are stocks and the remaining are investments in futures and currencies) while the index has 90. This uncommon feature where the ETF has more holdings than the underlying index is possible because of the sampling technique mentioned above, where the fund can include securities that are not included in the index. However, the top 10 holdings of GNR are exactly the same as that of its index and with almost the same weightings.

GNR invests in businesses from the natural resources sector based on their market capitalization. The selection is such that all the holdings are large-cap companies and they are picked from the global equity markets giving GNR cross-continental diversification. Even though the weightings are assigned to individual holdings based on market capitalization, the capping of 5% per stock across more than 100 stocks makes GNR’s composition widely balanced.

Strengths

The biggest strength of GNR lies in the structuring of this fund. Most of the constituents of the top 10 holdings of GNR are considered giants in their respective sectors. This is obvious given that one of the requirements to be in the investable pool of GNR is that the company should have a free-float market capitalization of at least $1 billion. All the constituents of GNR are large-cap companies and have stable and well-established businesses. This makes them able to pay more dividends to the investors while providing a sense of minimum risk which in turn works well for GNR and is clearly reflected through an impressive dividend yield of more than 4% for this ETF.

GNR has global diversification across 22 countries and 4 sectors. This protects the fund from the downsides of country-specific economic risks and opens global market opportunities. That said, GNR has a concentration at the top with almost half of the holdings in the US and UK given that the fund focuses its investments on developed markets and has a limit on the exposure to emerging markets of 15%.

Weaknesses

GNR has a standard deviation close to 30 and annualized volatility of more than 27% which suggests fluctuation in the price movement and might make this ETF seem risky to some investors. This could be because about 33% of GNR’s holdings belong to the energy sector, which, in general, has higher volatility than other commodities. Not to mention, this sector has a high standard deviation as it is directly affected by the changes in oil prices.

Opportunities

GNR has a concentration in the materials sector (61.5%) followed by the energy sector which accounts for another 33%. GNR’s composition benefits it, especially when the broad markets aren’t doing well. The reason is the increasing demand for energy along with the high performance of stocks in this sector. The S&P 500 Growth Index during a recent rebalance increased the energy sector weighting to 8% from 1%, a major change that shows the belief of markets points towards the positive future performance of this sector.

Energy stocks from the top 10 holdings of GNR such as Chevron Corp. ( CVX ), Shell plc ( SHEL ), BP p.l.c. ( BP ), and the third largest holding of GNR Exxon Mobil Corp. (XOM) are increasing in popularity and demand. A recent buyback announcement from Exxon at $50 billion and a $75 billion buyback of Chevron last year show that these companies are confident about their future performance and feel that the stocks are still undervalued.

GNR has over $3.75 billion in assets under management, making a decent expense ratio of 0.40% possible. Moreover, this ETF is highly liquid with a daily dollar volume of more than $17 million. This liquidity, combined with great performance is a win-win for me. Last year's price returns show that GNR has outperformed the S&P 500.

Threats

Although diversification is benefiting GNR from many angles, the currency risk remains. The US Dollar is strengthening in comparison to other currencies and this might affect funds like GNR with holdings across continents.

GNR has over 61% invested in the materials sector, and this sector is cyclical in nature and susceptible to economic downturns. Also, GNR has the highest concentration in American stocks. The broader equity markets are already low and problems like supply chain issues and possible recession in the US can affect GNR’s holding negatively. That said, the sector has outperformed the markets in the present and future performance will only be known with time.

Conclusions

ETF Quality Opinion

I like GNR for a lot of reasons. To name a few, large market capitalization, high dividend yield, global diversification, and a plethora of growth opportunities are the ones for which I would appreciate this ETF. The sectors in which GNR’s holdings lie are enjoying their prime and this wins GNR a top place in my watchlist.

ETF Investment Opinion

Although there are a couple of micro mini weaknesses and threats, the strengths and opportunities of this ETF outweigh the former. So, for all the reasons mentioned above, I rate GNR ETF a Buy.

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