GNR - GNR: Ride The Growth Of Global Demand

2023-12-21 12:41:18 ET

Summary

• The SPDR® S&P Global Natural Resources ETF is an alternative to the S&P 500 for long-term saving.
• GNR focuses on natural resources and offers diversified equity exposure across agribusiness, energy, and metals & mining sectors.
• GNR has a lower PE ratio and higher dividend yield compared to the S&P 500, potentially providing better long-term returns.

Some of my acquaintances doubt that the S&P 500 is the best fund for long-term saving and compounding. They sometimes ask me what sector or market might be currently undervalued and a better buy for today. In essence, the question is where to invest with more precision than the S&P 500 offers, while still having broad diversification. The SPDR® S&P Global Natural Resources ETF ( GNR ) is one such example.

As the name implies, it's a fund of companies that deal in various commodities. With current valuations and outlooks, I will make the case the GNR is a BUY for folks seeking a viable alternative to the S&P 500 and aren't looking to pick individual stocks.

Concept of the Fund

The fund seeks to track the performance of the S&P Global Natural Resources Index, which S&P Dow Jones Indices describes here . I'll quote its official description:

The index includes 90 of the largest publicly-traded companies in natural resources and commodities businesses that meet specific investability requirements, offering investors diversified and investable equity exposure across 3 primary commodity-related sectors: agribusiness, energy, and metals & mining.

By being invested in equities, the fund has potential for long-term growth, and the basic logic is that, by focusing on natural resources, a fund like GNR can have longevity because these are always broadly needed.

According to the Prospectus , the fund does not perfectly clone the Index. It notes that it uses a sampling strategy and may concentrate in securities that will have the same overall return as the Index. Similarly, it may only invest 80% of its capital in equities from the Index, while the other 20% could be put elsewhere.

As the chart above shows, the total returns of GNR since 2013 have not beaten the S&P 500, a key difference being the latter's exposure to tech. Still, that's important for 2013's buyers. We need to think about what's going to happen going forward, how that will affect businesses, and therefore which funds' companies and concentrations are in a better position to profit from those.

Composition and Influences

The fund's most recent fact sheet shows us how the fund is composed:

The largest individual companies are in the energy sector (oil, coal, natural gas), but we can see "Materials" makes up the bulk of the fund. This mainly includes minerals and metals, such as copper, iron, steel, gold, nickel, and so on.

While its contents are more international than American, it's mostly just in highly developed economies, with almost no exposure to Asia, Africa, or Latin America.

Knowing this, my view is that any growth in these businesses will arise from cost reduction or the rise in the price of the underlying commodities. As such, the fund doesn't necessarily need to be exposed to developing countries to benefit from their economic growth. As these countries develop, this will raise overall global demand and boost revenues even in other regions.

Much of this will be driven by China, given that it is one of the world's largest countries and still very much developing. See how much they have been dominating iron imports, as an example.

China also dominates copper imports , oil imports , and is second in aluminum after India. After a slower 2022 due to COVID, China is looking to increase public spending to grow its economy faster, which I believe will increase demand for the goods sold by the companies in this fund and thus grow their earnings.

Of course, the fact that other countries aren't quite as impactful as China, particularly ones that need to develop, doesn't meant that they won't be. If more countries work to grow their economies, these can add up to a similar increases in demand.

A Look to the Future

As I mentioned before, GNR is an idea raised as an alternative to the S&P 500, so it helps to consider what kind of returns and growth either can provide.

Dividend Reinvestment

As we saw already, S&P 500's total returns were greater

Above, we can see that GNR's annual dividend doubled from $1.24 to $2.49. Meanwhile, Vanguard S&P 500 ETF's ( VOO ) annual dividend came close, going from $3.11 to $5.95. I'll use more references to VOO since I know it's a well-liked fund for the S&P 500.

We'll say it's similar dividend growth, but with GNR currently yielding about 3.3% and a fund like VOO yielding about 1.4%, the effect of compounding by GNR from reinvested dividends would be greater at these prices.

S&P's High Multiple

GNR's PE from the TTM is just over 7. VOO's is just over 23 as I write this. These differences can have major impacts on long-term returns for today's buyers. As Peter Lynch once wrote of the relationship between the PE ratio and earnings growth rate in One Up on Wall Street :

The P/E ratio of any company that's fairly priced will equal its growth rate.

He also elaborated that a fairly valued company at a higher PE is a better buy because higher growth means higher compounding. As such, a fund like VOO could be a better buy, if we believe that the S&P 500's long-term , annual earnings growth is as high as 23% and that GNR's is no higher than 7%. I think that would be a reckless assumption. Let's look at that index's top holdings:

There is a heavy concentration in tech, and some of these companies are doing share buybacks with their stocks trading near all-time highs. Their own high PEs are a big reason why the S&P 500's is so high.

Microsoft's ( MSFT ) forward PE is 33, but it's been spending over $20 billion each year since 2020 on buybacks. Nvidia ( NVDA ), with a forward PE of 40 has recently spent as much as $10 billion on its buybacks. Even ones that aren't temporarily hiking up their prices in this way are trading at astounding multiples. Amazon ( AMZN ) is at 57. Tesla ( TSLA ) is at 80. Apple ( AAPL ) is often considered the cheaper one at 30.

As large as companies like these are, wherein they and their index start to push the limits of American GDP itself, one has to wonder where the growth lies and why these buybacks aren't being invested into that. All that needs to happen is for this ambitious growth to fail to materialize for several of these companies, and this can lead to them crashing and, with them, the S&P 500.

While it's true that GNR could always crash too, it's much more likely to be due to something other than overpricing, given its PE of 7. While it's never a guarantee if GNR's companies will grow at 7% each year over the long, it's more likely that GNR's PE reflects fair pricing, with a chance of better-than-expected upside.

Risks

Still, we want to consider some risks that could hurt my assessment.

China

China's growth may stall again, hurting demand for imports. Even if growth doesn't stall, trade barriers, particularly in the event of Trump victory in the 2024 election (or some other decline in relations with the U.S. and the West) could limit exports to them by several of GNR's companies. Investors will want to watch what is happening with China over the years if they own GNR and how that will affect commodity prices.

Oil

The fund's exposure to oil and other fossil fuels may prove disadvantageous farther down the road if the push for green energy takes off. Owners of GNR should observe what the impact will be here and how GNR might adjust its sampling method accordingly to minimize harm from weakened oil.

Mediocre Growth

It's possible the growth for these companies, even under great conditions, could still only be in the single digits. The nature of the S&P 500 being what it is, it could rotate in new companies with higher growth prospects. These could even make up for the disadvantage of tech's overvaluation in the long run. Investors should be mindful of how the PE of this fund tracks its actual growth going forward. If the S&P 500 prevents a better valuation before a "long term" has occurred, adapting and shifting out of GNR is prudent.

Conclusion

SPDR® S&P Global Natural Resources ETF lagged the S&P 500 over the last decade, but it has an interesting opportunity now. With the S&P having overvaluations in tech could burst, GNR sits at a low forward PE of 7 and the potential to ride the upside of increased commodity sales and prices as more of the world, particularly China, continues to develop in years to come.

As long as folks pay attention to changes in macro-environment and make sure that the PE ratio and growth rate aren't at odds, GNR should deliver. Investors looking for alternative funds to the S&P 500 for the long term can therefore find such with this fund, which is why I think it is a BUY at current prices.

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