BHPLF - HAP: It's Hard Not To Like This Fund

Summary

• VanEck Natural Resources ETF tracks an index of hard asset firms.
• HAP has a global portfolio with holdings across six continents.
• The fund invests in companies that generate at least half their revenue from hard assets including agriculture, alternatives, base/industrial metals, energy, forest products and precious metals.
• HAP has had an impressive run of late up 12% over the past three months.
• We rate HAP a Hold, as we believe the raw material sector has high potential for growth.

by Alex Rosen

Strategy

The VanEck Natural Resources ETF (HAP) tracks the VanEck Natural Resources Index. The fund invests in companies involved in the production and distribution of commodities and commodity related products and services in the following sectors: Agriculture, Alternatives (Water & Alternative Energy), Base and Industrial Metals, Energy, Forest Products, and Precious Metals.

The fund is registered in the Cayman Islands, so it is able to avoid K-1 filings. It is the first commodity fund to include alternatives. The index as well as the fund are rebalanced quarterly

Proprietary ETF Grades

• Offense/Defense: Offense

• Segment: New Growth

• Sub-Segment: Commodity Stocks

• Risk (vs. S&P 500): High

Proprietary Technical Ratings

• Short-Term (next 3 months): B

• Long-Term (next 12 months): B

(guide - A=Strong Buy, B=Buy, C=Hold, D=Sell, F=Strong Sell)

Holding Analysis

HAP holds a large basket of 431 holdings spread out across six different sectors. The weight of each sector is determined by global consumption. Geographically the fund covers the entire globe with holdings in every continent except Antarctica. The largest holdings are in the U.S. (52%), Canada (11%) and the UK (7.5%).

The largest individual holdings are Deere ( DE ) 5.8%, Exxon Mobil ( XOM ) 5%, Chevron ( CVX ) 3.7%, BHP Group ( BHP ) 3.4% and Bayer (BAYZF) 2.8%.

Strengths

HAP's focuses on global hard commodities including things like timber, metal, oil, and water. All are finite resources and all are tangible goods. The companies it invests in are some of the largest and most well known in the world. By weighting holdings based on global consumption, HAP ensures that it is holding high demand equities.

As the population increases, naturally the global demand for resources increases. The two go hand in hand. That isn't rocket science. More people equals more mouths to feed, more cellphones to make, more energy to consume, more patients in need of pharmaceuticals.

By investing in companies that focus on the extraction and production of those resources, HAP has found a market that will continue to expand.

Weaknesses

Because the fund is so diverse, it makes it difficult to really drill down on one particular sector or region. As a result, it's very difficult to capture dramatic upswings in any given sector. A sudden surge in the price of gold will only have a slight effect on the overall fund price.

The upside of that though is it cuts both ways. A sudden drop in one sector won't dramatically affect the price either.

Opportunities

Under normal conditions the demand for hard commodities will continue to grow. When something like a global pandemic occurs, it will have a deleterious effect on consumption, but as we are seeing now, the after effect is essentially the rising tide theory. The demand for all hard commodities has increased steadily since March of 2020, with some obviously doing better than others.

Threats

As mentioned above, resources are finite. They are also fickle. Today's skyrocketing demand for oil and rare earth metals could become a complete bust tomorrow. A global fund is subject to global shocks, and HAP is truly a global fund.

Conclusions

ETF Quality Opinion

We like funds that are transparent and uncomplicated. Funds that choose holdings based on 76 metrics inputted into an algorithm tend to make understanding them more complicated. Furthermore, funds that invest in physical assets or at least companies that deal in physical assets tend to hold their ground better and make for less complicated investing.

HAP is a plain vanilla fund that invests in hard assets.

ETF Investment Opinion

One thing is certain, as the population continues to expand, the demand for resources, oil, timber, gold, energy, etc., will continue to increase. The companies that extract them or produce them are well positioned to reap the benefits of this continued expansion. As a result we rate HAP a Hold with the understanding that if economic conditions continue to hold steady, that may move towards a buy in the next 12 months or so.

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