In this article, let´s take a look at iShares North American Natural Resources (IGE, Financial). An ETF is a special type of fund that invests in a portfolio of stocks or bonds. The aim is to mimic the performance of a specified index. As well as the shares, they are traded in the secondary market at any time (market hours), and investors can sell short. The advantages of this investment vehicle are that they provide an efficient method of diversification because investors gain exposure to an index or a particular sector. Investors know the composition of the fund at all times. Moreover, as they are a passive managed fund, they have good operating expense ratios.
The IGE ETF
This ETFseeks to provide investment results that correspond to the performance of the S&P North American Natural Resources Sector Index.
The top 10 holding represent 40.2% of total portfolio, and the list includes companies such as: Chevron (CVX, Financial), Exxon Mobil (XOM, Financial), Schlumberger (SLB, Financial), ConocoPhillips (COP, Financial), Kinder Morgan (KMI, Financial), Occidental Petroleum (OXY, Financial), EOG Resources (EOG, Financial), Phillips 66 (PSX, Financial), Anadarko Petroleum (APC, Financial) and Suncor Energy (SU, Financial).
In terms of industry allocation, the fund has the following structure: the top sub-industry weightings currently belong to the Oil and Gas (58.83%), Oil and Gas Services (14.36%), Pipelines (9.82%), Mining (7.64%) and Packaging and Containers (4.72%).
As of March 18, the geographic focus is the U.S. (85.3%) and Canada (12.8%). Also, it invests practically all in stocks (99.8%) while cash and others have an insignificant participation.
Value at risk
Value at risk (VaR) is a probabilistic method of measuring the potential loss in portfolio value over a given time period and for a given distribution of historical returns. VaR is the dollar or percentage loss in portfolio value that will be equaled or exceeded only X percent of the time.
So there is an X probability that the loss in portfolio value will be equal to or greater than the VaR measure.
The analyst must select the X percent probability, and the time period over which VaR will be measured. Generally, it is used a one-day period.
Although there are various methods, now we are going to concentrate on the Monte Carlo Simulation. This method generates hundreds, thousands or even millions of possible outcomes from the distributions of inputs specified by the user.
We are now assuming you are a risk manager and calculate the daily 1% VaR. The VaR (1%) indicates that there is a 1% chance that on any given day, the portfolio will experience a loss of $63,422,412 or more. We could also say that there is a 99% chance that on any given day the portfolio will experience either a loss less than $63,422,412 or a gain.
Final comment
Although the fund has generated a total return of 3.14% in the last five years, -1.42% in the last three years and -12.62% in the last year, this ETF provides exposure to a future increasing demand; of course with some potential risk that we try to measure through the VaR calculus.
Gaining exposure into natural resource companies provide a hedge against inflation because these companies find it easier to pass on cost increases to end users.
Disclosure: Omar Venerio holds no position in any stocks or funds mentioned.
