Natural Resources ETF Is Plain Vanilla

A recent run-up in oil prices combined with uncertainty in the air has caused investors to grab for oil and gold ETFs. The evolution of ETFs has led to a set of very focused and concentrated products to meet these needs: Oil Services HOLDRs (OIH), iShares Comex Gold Trust (GDX), U.S. Oil (USO) and U.S. Natural Gas (UNG) to name a few.

Don't even get me started on the single commodity funds proffered by iPath -- an ETF just for cotton ( iPath Dow Jones-AIG Cotton ( BAL))? Investors can still seek a well-rounded approach, however, to natural resources with iShares S&P North American Natural Resources ( IGE).

IGE is a good reminder of what attracted many investors to ETFs in the first place: cheaper alternatives to mutual funds. IGE tracks a range of natural resource companies rather than a single commodity, offering investors access to this sector without the fees of mutual funds or the confusion of the futures market.

IGE tracks a basket of U.S.-traded natural resource companies ranging from oil and gas producers to metals and mining companies to energy equipment manufacturers. The top 10 components in IGE's basket currently include Exxon Mobil ( XOM), Barrick Gold ( ABX) and Suncor Energy ( SU).

The simplicity of IGE is its strongest suit. IGE contains 127 stocks and allocates a reasonable 8.32% of its portfolio to top component Exxon. Compare this balance to iShares' more focused Energy Sector ETF ( IYE) -- which allocates more than 25% of its portfolio to Exxon -- and the mix seems reasonable.

You won't see the volatility that comes with more "pure" oil or gold funds on both the upside and downside, but that's a good thing for many investors looking to allocate a small portion of their portfolio to natural resources.

Is IGE the cheapest fund? No -- IGE's 0.48% pays for a peace of mind, however, for investors looking to avoid the double concentration of a commodity fund with a huge bet on a top holding.

In the hurry to grab for increasingly exotic products, some of the simplistic beauty of ETFs has been lost. Plain vanilla ETFs offer investors transparent portfolios for a low cost. Funds like IGE help average investors allocate their funds to a volatile area of the market, such as natural resources, while dampening the risk through the nature of their construction.

It is certain that the explosion of ETFs will continue to lead to more focused products and complex strategies, but investors should not forget products like IGE in the shuffle.

At the time of publication, Dion had no positions in the stocks and funds mentioned.

Don Dion is the publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.

Dion is also president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

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