Morningstar Magazine - December/January 2015 - 67

While this surge in production may reduce oil
prices, unpredictable geopolitical events can
create supply disruptions and cause prices to spike.

is relatively fixed, these long-term trends likely will
increase demand for yield-enhancing products.

Despite rebounding from their April 2012 low, U.S.
natural-gas prices remain under pressure
from production growth and are significantly lower
than those in Europe or Japan. However,
Morningstar equity analysts expect natural-gas
prices to rise over the long run. Natural gas
becomes less attractive to power-generating
companies as it becomes more expensive relative
to coal because they can substitute between
the two to an extent. This may help reduce the
price movements necessary to balance
changes in supply with demand. Natural gas is a
significant cost driver for the fund's nitrogen
fertilizer producers, including Agrium AGU and
Potash Corporation of Saskatchewan POT.
Consequently, these holdings may partially hedge
the fund's exposure to natural-gas prices.

The S&P Global Natural Resources Index forms
the basis of the fund's portfolio. This index tracks
the world's 90 largest stocks in the agriculture,
energy, and metals and mining sectors.
Within each sector, S&P selects the 30 largest
stocks and weights them by market cap.
To improve diversification, S&P caps each sector's
U.S. and emerging-markets exposure at 40%
and 15%, respectively. Finally, it assigns equal
weightings to each of these three sector
subindexes and limits individual holdings to 5%
of the portfolio. To qualify for inclusion in the
index, each holding must trade on a developed-markets exchange and meet minimum
liquidity requirements. The index is reconstituted
annually in August and rebalanced quarterly.
Top country weights belong to the United States,
United Kingdom, and Canada. However, these
stocks have global operations and are exposed to
global commodity markets.

Portfolio Construction

Crop prices can have a significant impact on
demand for yield-enhancing seeds, chemicals, and
equipment in the short term because farmers'
incomes are closely tied to them. But ultimately,
the performance of the fund's holdings in
the agricultural industry will be driven by their
ability to stay ahead of their competitors in the
race to meet the growing demand for food. Growth
in global population and rising incomes in
developing markets will require agricultural output
to increase significantly during the next few
decades, according to the Food and Agricultural
Organization. Because the amount of arable land

Style Map 9/30/2014

Alternatives

Market Vectors RVE Hard Assets Producers HAP
(0.5% expense ratio) is a close substitutes. This ETF
tracks companies that generate more than 50% of
their revenue from the production of commodities.
Its portfolio rests on a broader base of more
than 300 securities across six hard-asset sectors.
Investors looking for similar exposure and extra
income might consider WisdomTree Global
Natural Resources GNAT (0.58% expense ratio). It
targets dividend-paying companies in naturalresources industries and weights its holdings by
dividend yield to maximize income. K
Alex Bryan is an analyst specializing in passive strategies
with Morningstar's manager research group.

Fees

The fund charges a reasonable 0.4% expense
ratio. However, over the trailing three years
through October 2014, it only lagged its benchmark by 0.06% annualized. State Street
engages in share lending, the practice of lending
out the fund's underlying holdings in exchange
for a fee. It passes through 85% of the
proceeds to investors, which partially offsets the
fund's expenses.

Top 10 Holdings 9/30/2014
Giant Large Mid

Centroid:
Weighted avg. of
equity holdings

Small Micro

Zone: 75%
of fund's equity
holdings

Stock

Weight (%)

Stock

Weight (%)

Exxon Mobil Corporation XOM

5.10

Glencore PLC GLEN

3.84

BHP Billiton Ltd BHP

4.46

Chevron Corp CVX

3.16

Syngenta AG SYNN

4.29

Total SA FP

3.14

Potash Corp of Saskatchewan Inc POT

4.26

Royal Dutch Shell PLC Class A RDSA

3.12

Monsanto Co MON

3.86

BP PLC BP.

2.89

Deep Value Blend Growth High
Value
Growth

global.morningstar.com/Morningstarmagazine

http://global.morningstar.com/Morningstarmagazine

Morningstar Magazine - December/January 2015

Table of Contents for the Digital Edition of Morningstar Magazine - December/January 2015