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The Red-Hot Natural Resource Sector: What’s Driving The Rally and How to Implement

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Rising demand and global supply constraints have recently sent natural resources prices skyrocketing. As several sectors across the natural resources market heat up, how can investors think about gaining exposure in their portfolios?

On a recent episode of our Funds in Focus podcast, we spoke with Investment Strategist Mark Carlson and Director of Asset Allocation Strategy Daniel Phillips about how the current environment has created the perfect storm for natural resources prices—and how investors can approach implementing an allocation to the asset class.

In this episode, you'll learn

  • Why so many natural resource markets are running so hot
  • The hottest segments in the market
  • How the team at NTAM incorporate natural resources into client portfolios

THE PERFECT STORM FOR NATURAL RESOURCES PRICES

Rising demand combined with supply shortages have created the perfect storm for commodities and natural resources prices. At the onset of the pandemic in the first half of 2020, factories and producers either running at reduced capacities or shuttering entirely resulted in significant supply shortages.

As economies started reopening in the third quarter of 2020, demand began to recover—further supported by monetary and fiscal policy. Demand has since continued to rise, driven by the COVID-19 vaccination rollout and the prospect of increased fiscal spending under the Biden administration.

With demand on the rise and supplies running short, the fundamental rules of economics have taken over, spurring rising natural resources prices.

THE HOTTEST NATURAL RESOURCES SECTORS

The natural resources rally has been widespread across sectors, with a few that have experienced particularly strong performance:

  • Lumber: Sawmills were shuttered in 2020 amid COVID-19 safety concerns just as US housing demand surged, driven by low interest rates and a pandemic-triggered exodus from urban environments. As a result, lumber prices have surged.
  • Copper: Copper production was also subject to early pandemic shutdowns, such that supply continues to fall short of rising demand resulting from reopening economies and increased housing demand. The global transition to a low carbon economy is further supporting copper demand and driving higher prices.
  • Oil: After a dramatic drop early in the pandemic, oil prices have since surged in the face of rising demand and OPEC’s disciplined crude production.

THE IMPORTANCE OF A BALANCED APPROACH

While the perfect storm of short supply and rising demand has propelled strong performance for each of these natural resources sectors, it’s possible some sectors could overheat—and others could have more growth potential. A balanced approach where a natural resources allocation spans a broad swath of sectors could help mitigate these risks.

Our FlexShares Morningstar® Global Upstream Natural Resources Index Fund (GUNR) was designed to provide efficient and balanced exposure to a broad expanse of global natural resources sectors in a single ETF. It’s comprised of natural resources equities across numerous sectors including energy, metals, timber, and water. As such, investors gain natural resources exposure without the need to time which sectors could be heating up—and which could be due for a downturn.

NATURAL RESOURCES IMPLEMENTATION CONSIDERATIONS

At FlexShares, many clients are looking to natural resources for both their inflation hedge and capital appreciation potential. And they’re often asking how they should go about implementing exposure to natural resources.

When it comes to funding the allocation, it’s first important to think about what part of the portfolio to draw from. Natural resources are a risk asset, akin to anything that has equity exposure. As such, when thinking about a global natural resources allocation, sourcing the funds from the portfolio’s global equity allocation could be the best fit with respect to risk budgeting.

It’s also important to consider the implementation vehicle. While many investors associate commodities investing with futures contracts, as we explained in a previous episode, natural resource equities can have numerous advantages over commodity futures investing.

Please see our FlexShares Morningstar® Global Upstream Natural Resources Index Fund (GUNR) for more information on our diversified global natural resources equity ETF.


IMPORTANT INFORMATION

Before investing, carefully consider the FlexShares investment objectives, risks, charges and expenses. This and other information is in the prospectus and a summary prospectus, copies of which may be obtained by visiting www.flexshares.com. Read the prospectus carefully before you invest.

Foreside Fund Services, LLC, distributor.

An investment in FlexShares is subject to numerous risks, including possible loss of principal. Fund returns may not match the return of the respective indexes. A full description of risks is in the prospectus.

FlexShares Morningstar® Global Upstream Natural Resources Index Fund (GUNR) is subject to the global natural resource industry. As the demand for or prices of natural resources increase, the Fund's equity investment generally would be expected to also increase. Conversely, declines in demand for or prices of natural resources generally would be expected to cause declines in value of such equity securities. Such declines may occur quickly and without warning and may negatively impact your investment in the Fund.

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