Van Eck Global this week launched the Market Vectors Hard Asset Producers ETF ( HAP) which is based on an index the New York asset manager created with help from international investor Jim Rogers. Over the last month or so anything having to do with hard assets, the commodities themselves and the companies that mine or produce them, have been crushed. This part of the market has undergone an extreme dislocation that may not have finished playing out yet. The simple fact that the resource space is down recently doesn't make HAP a good fund or a bad fund. Nor is the timing of the introduction of the fund good or bad. HAP is simply a new way to access this part of the materials space. The ETF may be better or worse than other materials funds but the fact the group is down has no bearing on the utility of the fund. Anyone who believes in maintaining a diversified portfolio has some exposure to the space. And the fund does make a good first impression. The methodology of the fund is unique. The fund weights its subsectors (energy 40.3%, agriculture 30.5%, industrial metals 13.3%, precious metals 7.5%, paper and forest 4.3%, and alternatives 4.1%) by how much of each is consumed. By the funds research, 40 cents of every dollar spent on natural resources is spent on energy. The fund invests the most in the U.S. at 39.2%, with Canada at 14.8%. It also has exposure to many other countries like Brazil, Russia, Norway, Malaysia, South Africa and Japan.
The fund has 321 holdings. The top 10 make up 33% of the fund. The ETF's top three holdings: Monsanto ( MON), Potash Corp. of Saskatchewan ( POT), and Exxon Mobil ( XOM), make up close to 15% of the fund. A misstep by any of these three could be a drag on the fund's performance. The expense ratio of the Market Vectors Hard Asset Producers ETF is capped at 0.65%, the index yield is 1.59% (less the fee implies a yield for the fund of just under 1%) and 88% of the fund is in large-cap stocks. The back test, not surprisingly, has been very volatile relative to the broader markets. The standard deviation of the index has been running at 17.19 for the last five years compared with just 9.47 for the Standard & Poor's 500. Some sectors, like utilities, are used to reduce volatility while other sectors, such as natural resources, are often used to add volatility. That the fund likely will be volatile isn't bad. I believe its volatility must be accounted for when adding it to a diversified portfolio. The volatility expected from HAP isn't much different than any other fund that focuses on the resource portion of the materials sector. An exact comparison of HAP's back test with similar funds isn't easy but a close comparison can be made. For the year through July 30, HAP's back test returned 20.56% versus 5% for iShares S&P Global Materials Sector Index Fund ( MXI), and break even for WisdomTree International Basic Materials Sector Fund ( DBN). The three-year number for HAP's back test also goes through July 30, and averages 28.75% a year compared with three-year numbers of 34.05% for MXI, and 34.58% for DBN. The three-year numbers for MXI and DBN are through June 30, and the numbers for DBN include a reinvested dividend from the back test that the fund may not be able to duplicate.
It seems pretty clear that the one-year numbers for HAP can be attributed to the surge in agricultural stocks versus the rest of the resource segment. For instance, Monsanto and Potash were up triple digits or close to it. The knock about blending together energy, agriculture, mining and the like means an investor might lose the benefit of stock picking from those sectors. That may be, expect if you consider the way this cycle has unfolded on the way up and the way down. The good times lifted these groups together, and this summer they all unwound together. Therefore, there may be little correlative benefit to breaking down energy, agriculture and mining into separate picks. But there could be a benefit where volatility is concerned. HAP is heavy on volatility. There is nothing wrong with some of that in a diversified portfolio but this part of the market is prone to some nasty declines, similar to what occurred this summer. Combining HAP, or MXI or DBN, with other materials holdings that are less volatile might be a better way to go.