GUNR - GUNR: An ETF For Value Investors Who Can See Past The Current Stock Market Noise

2023-10-24 10:59:23 ET

Summary

• FlexShares Morningstar Global Upstream Natural Resources Index Fund ETF receives a Hold rating due to its undervalued, diversified, and high-quality nature.
• The ETF is relatively lower-risk compared to other equity segments and has the potential to perform well if the energy sector performs strongly.
• GUNR is a diversified ETF that invests in energy, basic materials, timber, agriculture, water, metals, and has a focus on upstream companies.

FlexShares Morningstar Global Upstream Natural Resources Index Fund ET F ( GUNR ) get a Hold rating from me, though I don’t own it. That rating simply reflects my conclusion that it is neither something I’d buy new or sell right now if I owned it.

I follow about 200 ETFs, and don’t own more than perhaps 20 at a time across the trio of model portfolios I run at ETFYourself.com and in my personal trading accounts. So as I cover ETFs like GUNR which are on my watchlist, I strongly emphasize the research and the rationale, rather than the bottom-line rating.

GUNR is typical of what I see in a few segments of that 200-ETF watchlist. It is statistically undervalued, high-quality, smartly diversified for the space it invests in, and even has a decent dividend yield. What’s not to like? It invests in stocks. And about once or twice in a generation, it may not matter what stocks you own. They are all high risk. So, the Hold rating I assign signifies that GUNR is in the lower-risk group of all the equity segments I track. If the equity market follows through to the downside, it has a “puncher’s chance” of not losing much or even making money if the energy sector flies.

But even in an environment of strong oil prices, if the market decides to see energy and other natural resource stocks as stocks, and not a different way to participate in commodity prices, it won’t matter. So, this is a relative bull case for GUNR, as will be the case for nearly any equity ETF I cover until further notice. Oh, and to be clear, I’ll be shouting through my written words when this bear era is starting to end, and we can go back to buying equity ETFs with the traditional idea of holding them for at least a year, hopefully many years. That time is not now.

ETF ratings in the current environment: not business as usual!

In addition, as someone who sat in the fiduciary advisor “hot seat” for 27 years but has retired from that business, no bottom line ETF rating should EVER be interpreted as an instruction, as personalized advice, or as anything other than my assessment at the moment I write it. I’m explaining this here because, as I’ve noted on recent Seeking Alpha podcasts and articles, I believe this is the most dangerous market climate I’ve seen in my 30 years in the professional investment industry.

That view has a lot to do with how investors are over-simplifying and/or misinterpreting things like ratings, opinions and individual security work. In my strong opinion, this is a time where portfolio weightings and risk management are way more critical than any isolated rating, grade or “pick.” Those are great for media headlines and clicks. But as I discuss with the many excellent commenters on my articles, the focus on that over the bigger picture is at “all-time dangerous” levels right now.

GUNR: more than just an energy fund

Energy and Basic Materials stocks comprise more than 80% of GUNR, but there is significant diversification within that sector allocation. GUNR is diversified on multiple levels, making it a decent choice as a support position. That is, when I do own it, it tends to be a mid-sized position. GUNR is not an Energy ETF masquerading under the banner of “Natural Resources”. It is actually a true, diversified Natural Resource ETF and tracks the Morningstar Global Upstream Natural Resources Index, holding stocks in timber, agriculture, water, and metals, as well as energy.

GUNR is also diversified globally, with 34% invested in the US, 15% in the UK, 14% in Canada, 8% in Australia, and the remaining 29% spread around the globe. If we take a closer look at the top 25 holdings we can find an even deeper level of risk mitigation through holding multiple securities.

Top 25 holdings include eight energy companies, eight agriculture businesses, eight Metal related companies and a water company. Digging one level deeper, within the eight energy companies are the usual oil & gas focused stock giants, but also companies that have diversified into solar, as well as one that is focused on Nitrogen and Hydrogen development as a clean energy resource.

Here are the Seeking Alpha quant factor grades for GUNR's top six holdings. Three of the six have above average valuation grades, and GUNR's entire portfolio sells at only around 11x forward earnings and less than 0.9x forward revenue estimates, while yielding over 3% (all of that data is from Ycharts). So in a market where opportunities are relatively scarce, there's some fundamental value here.

The agriculture focused companies show a similar diversity, with crops, meat, seafood, fertilizer, and nutrition research all represented. And the eight Metal related businesses include participation in miners, refineries, tailings recycling, and investments represented on a broad range of metals: iron, copper, platinum, and gold to name a few, as well as diamonds. All of this diversification creates a robust fund, but one that is still weighted towards upstream companies, with the majority of its top holdings(20/25) focused on production of raw natural resources, not downstream, processing or consumer-facing companies.

ETF Size, Performance and Key Features

GUNR is a passively managed ETF and uses a representative sampling strategy to track its underlying index: Morningstar Global Upstream Natural Resources Index. This means that the fund managers do not own every stock in the index, just enough to feel confident they can track the index’s performance very closely. At a time in the market cycle where there are some very large companies and many, many smaller ones, this is not very difficult to do.

GUNR tracks an Index of more than 100, but its current portfolio is a bit top-heavy, with the 10 largest holdings accounting for 37% of assets. I have noted as recently as in last Sunday’s Wall Street Breakfast podcast that when it comes to ETF selection, I prefer a narrower grouping at the top in most cases, so I know better what I own.

GUNR is susceptible to the global prices in Natural resources, fluctuating with the rise and fall of demand for those resources. But since it also caps weightings by region and sector to prevent becoming unbalanced towards big names in the energy sector, it has a distinct advantage should the recent spike in energy prices recede. GUNR is a big ETF, at more than $7 billion in assets, so liquidity is not an issue, especially since its holdings tend to be large and mid cap companies.

I consider GUNR to be an inflation-resistant ETF, due to its focus on “upstream” companies.. How exactly does this translate into resistance against being eroded by inflation? As FlexShares, the ETF sponsor explains, “upstream companies sit at the start of the supply chain and produce or develop resources that are then transported to processors. Downstream companies process natural resources into consumer goods. Downstream companies may face complexities and costs related to packaging, distribution, marketing, branding, and other factors that can affect profitability and cash flow. By contrast, upstream companies can be less complex because their costs lie primarily in resource extraction, with minimal processing and delivery to downstream companies. Upstream companies also may benefit from raw material price increases, while downstream companies, which must pay those higher prices for their input materials, may experience negative impacts.”

When consumer demand slows, whether due to rising prices or not, upstream businesses have probably already been paid. For instance, the drilling is done well before the consumer pays for the gas at the service station. In the current consumer-challenged era I believe is strengthening by the day, I’d rather be allocated more heavily to the upstream business than downstream.

Summary thoughts

GUNR is a diversified inflation-sensitive ETF, which is why I think it can hold its ground better than many parts of the equity market. It makes my short-list of ETF’s to consider if inflation reaccelerates as it did in the 1970s, as well as a upper-tier ETF to hold as we ride out the current market volatility. I rate GUNR a Hold and as a supporting position, 10-20% of a portfolio that is looking for a long-term return on investment over a period of years.

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