By Heather Bell
Commodities are hot right now. Very hot. Everybody's watching the performance of futures contracts and the indexes tracking those contracts. However, commodities do come from somewhere. Copper, for example, does not spring from the earth in shiny little coils, and soybeans do not grow in the wild in neatly formed rows.
There's planting, extracting, refining and hundreds of other processes that must be implemented before commodities ever reach the end consumer. But we're not hearing so much about the companies that actually produce the commodities we use. That might be about to change.
Commodities expert (and the creator of his own family of widely followed commodities indexes) Jim Rogers and Van Eck Global have teamed up to create what appears to be the first comprehensive global index of hard assets producers. There already are sector indexes, of course, that cover commodities producers in a particular area - such as the stand-alone Amex Gold Miners Index or the industry-specific sub-indexes that can be found in most broad-based global index families.
There is also the S&P North American Natural Resources Sector Index, which cuts across different commodities-related sectors but isn't global in scope. Before now, there does not appear to have existed a wide-reaching global equity index that covered commodities producers across a range of sectors - let alone an entire index series.
Find A Gap And Fill It
"I don't know of any [other similar indexes]. That was one reason I wanted to do it," said Rogers. "When there's a gap, particularly in something you think people need to know about or participate in, somebody's got to do it - so we did it."
The Rogers Van Eck Hard Assets Producer Index family includes a headline index of more than 300 companies, in addition to a composite index that contains nearly 850 stocks. The series also includes an extra-liquid index with just 50 stocks and three sector indexes covering agriculture, energy and metals. In all, the family includes the stocks of companies domiciled in 39 different countries, and the companies in the headline index have a combined market capitalization that represents 15% of the global total.
There's a lot that's interesting about the index family. For one thing, it isn't limited to producers per se - it also includes companies that provide vital products and services to those producers. It also isn't limited to producers of commodities that are featured in the major commodity indexes or even the ones that have futures contracts based on them - the index family's scope includes an "alternatives" category that covers companies such as water utilities and companies involved in the production of energy from alternative resources like the sun or the wind. The Alternatives category encompasses companies involved in alternative energy resources, energy efficiency, water utilities and water infrastructure and technology; the sector represents about 4% of the headline index.
"As the world changes, we are prepared for the changes," Rogers said of the decision to include the Alternatives category, pointing out that equity shares are the only way for investors to access those areas of the commodities markets since there is no futures market.
The other five sectors covered by the index are agriculture, base/industrial metals, energy, forest products and precious metals. The sectors are weighted within the index based upon global consumption, while individual equities are weighted within those sectors by float-adjusted market capitalization.
The index family is focused on pure-play companies: Each company must derive at least 50% of its revenues from its operations in the commodity sector it falls into. However, that requirement is waived (to 25%) for companies operating in the water sector, since that tends not to be their only focus.
Not surprisingly, Van Eck, which has already launched a number of equity-based ETFs that cover companies operating in commodities sectors such as steel and coal, has a hard assets producers ETF in registration that will track an unspecified index - probably the headline Rogers Van Eck Hard Assets Producers Index. (Read the prospectus here.)
And what will this index offer investors? Well for one thing, Rogers points out, there are still an awful lot of investors who get nervous as soon as the word "commodity" is uttered. A product based on the index will offer commodities exposure through the companies that operate in that area without actually investing in the commodities themselves.
"Some people just cannot bring themselves to buy commodities for whatever reason, so this is an alternative," Rogers said.
Alternative Approach
And let's not forget the current situation: Given that the Commodity Futures Trading Commission and Senator Joseph Lieberman are taking a hard look at whether funds investing directly in commodities are driving up commodities prices and whether legislative intervention is needed, more than a few investors may be interested in an index (and by extension any product based on it) that offers exposure to commodities through equities rather than futures.
Rogers said the equities-based RVE Hard Assets Producers Index has outperformed most pure commodities indexes recently, but that it should correlate with those indexes over time - with either the futures-based indexes or the RVE index outperforming in any given time period. However, commodity-related equities tend to correlate more closely with equity markets than with commodities markets, which means investors who opt for commodity equities rather than commodity futures could be missing out on the well-documented diversification benefits of commodity futures.
According to back tested data, for the past five years, the RVE headline index was up more than 300% versus increases of about 139% for the Dow Jones-AIG Commodity Index and 77% for the S&P GSCI. Year-to-date, the RVE index was down more than 9%, while the DJ-AIGCI was up nearly 3.5% and the S&P GSCI was down a little more than 2%.
Sector | Weight |
Agriculture | 31% |
Alternatives | 4% |
Base/Industrial Metals | 13% |
Energy | 41% |
Forest Products | 4% |
Precious Metals | 7% |
RVE Hard Assets Producers Index - Top 10 Components | |||
Company | Sector | Country | Weight |
MONSANTO CO | Agriculture | United States | 4.58% |
EXXON MOBIL CORP | Energy | United States | 4.41% |
POTASH CORP OF SASKATCHEWAN | Agriculture | Canada | 3.79% |
MOSAIC CO/THE | Agriculture | United States | 3.63% |
GAZPROM OAO-SPON ADR -REG S | Energy | Russia | 2.77% |
DEERE & CO | Agriculture | United States | 2.71% |
PETROLEO BRASILEIRO S.A. -ADR | Energy | Brazil | 2.17% |
PETROCHINA CO LTD-H | Energy | China | 2.09% |
ARCHER-DANIELS-MIDLAND CO | Agriculture | United States | 2.09% |
SYNGENTA AG-REG | Agriculture | Switzerland | 2.00% |
