VanEck expects strong growth in natural resources ETFs for 2017

Dec 6th, 2016 | By | Category: Commodities

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Shrugging off a weak start in the first two weeks of 2016, exchange-traded funds tracking the natural resources sector have enjoyed significant growth throughout the rest of the year – the VanEck Vectors Natural Resources ETF (NYSE: HAP) is up 22.1% year-to-date (YTD), as of 30 November 2016. Despite the strong performance, VanEck argues that energy and mining stocks are only in the early stages of a cyclical rebound, setting the sector up for further growth in 2017.

VanEck expects strong growth in natural resources ETFs for 2017

Reflecting the broad turnaround in commodity markets, the VanEck Vectors Natural Resources ETF (NYSE: HAP) is up 22.1% year-to-date, as of 30 November 2016.

Uwe Eberle, Head of International Business Development and Distribution at VanEck, commented: “We expect 2017 to be another solid growth year for the natural resources sector, and one in which we should see the profitability of gold, mining, and oil and gas companies rise as operational changes are implemented and the commodities price cycle becomes more favourable.”

HAP tracks the Rogers VanEck Natural Resources Index, which references the performance of global companies involved in the production and distribution of commodities and services in the agriculture, alternatives (water & alternative energy), base and industrial metals, energy, forest products, and precious metals sectors.

As of 30 November 2016, HAP’s largest country exposures are the US (48.0%), Canada (10.1%) and the UK (6.4%). The largest sector exposures are to materials (42.5%), energy (30.4%) and consumer staples (15.1%). With 309 holdings the largest single exposures are to Monsanto (6.2%), Syngenta (4.9%), Exxon Mobil (4.6%) and Deere & Co (4.0%).

Reflecting the broad decline in commodity markets over the past few years, the fund lost 42.2% of its value between July 2104 and January 2016. While the ETF has recovered significantly since then, further growth in the natural resources sector could drive the ETF’s value higher.

“In the past, these cycles have generally lasted upwards of five years with, in some cases, commodities equity values doubling within the first three years,” Eberle said. “The harsher the market downturn, the higher and longer the upside, especially for investors prepared to weather periods of volatility.”

HAP has a total expense ratio of 0.50% due to a contractual fee waiver in place until May 2017. Its gross expense ratio is 0.75%.

VanEck believes natural resources companies will aim to facilitate long-term growth in shareholder value by transitioning to sustainable, disciplined growth plans.

In the mining sector, for example, the priority will be achieving balance of supply and demand, rather than embarking on new projects. For the oil and gas sector, VanEck believes companies are more likely to invest in US unconventional shale plays and shallow water developments, rather than frontier, deep water exploration.

The VanEck Vectors Unconventional Oil & Gas ETF (NYSE: FRAK) offers a play on the US oil and gas industry. The fund tracks companies involved in the exploration, development, extraction, and/or production of unconventional oil and natural gas, including coal bed methane, coal seam gas, shale oil, shale gas, tight natural gas, tight oil, tight sands, in situ oil sands, and enhanced oil recovery. It has a TER of 0.54% and is up 41.7% YTD.

European investors looking to access the global oil & gas industry may wish to consider the iShares Oil & Gas Exploration & Production UCITS ETF (LON: SPOG). It has $220m in AUM and a TER of 0.55%. The fund is up 38.5% YTD.

The other focuses for value creation by natural resources firms, argues VanEck, will be on cutting costs, improving productivity, and strengthening balance sheets.

Efforts to reduce costs should be supported by declining costs of equipment and technological advances. For oil and gas companies, reduced costs resulted from implementing innovations in drilling and well design and lower prices further down in the supply chain.

In the mining sector, while the all-in sustaining costs for gold have fallen from around $1,200 in 2012 to just over $900 today, VanEck believes this figure could fall below $700 as technological advances improve operational efficiency.

The VanEck Vectors Gold Miners ETF (NYSE: GDX) and the VanEck Vectors Junior Gold Miners ETF (NYSE: GDXJ) provide access to the global gold mining sector. GDX covers a comprehensive portfolio of large-, mid-, and small-capitalisation global gold mining companies. It has a TER of 0.52% and is up 51.5% YTD. A UCITS-compliant version of the fund is also available in Europe (LON: GDX) where it has a TER of 0.53%.

GDXJ invests in micro-, small-, and medium-capitalisation mining companies, called “juniors” because they are in an exploratory or early mining phase. The fund has a TER of 0.56% and a UCITS-compliant version of the fund is listed in Europe (LON: GDXJ) with a TER of 0.55%. It is up 78.1% YTD.

The largest ETF in Europe to track global gold mining stocks however is the iShares Gold Producers ETF (LON: SPGP) with $360m in assets under management. The fund has a TER of 0.55%.

Investors interested in a pure play of other industries within the natural resources sector may also consider the VanEck Vectors Coal ETF (NYSE: KOL), TER – 0.59%; the VanEck Vectors Oil Refiners ETF (NYSE: CRAK), TER – 0.59%; or the VanEck Vectors Steel ETF (NYSE: SLX), TER – 0.55%.

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