Oil Volatility Shifts Focus to Upstream CCNR

Commodities exchange traded fund exposure may matter more now than at any recent point. That was the central message at a VettaFi webcast held Tuesday.

Key Takeaways:

• Commodity producers make up 5% of the S&P 500, down from 35% in the late 1970s.
• The Strait of Hormuz handles more than 25% of global seaborne oil trade and is just 20 miles wide at its narrowest point.
• The ALPS Core Commodity Natural Resources ETF holds around 300 names and charges 39 basis points.

Roxanna Islam, head of sector and industry research at VettaFi, moderated the discussion. The session bore the title “Hard Assets in a Hard World: Commodities in the Era of Geopolitical Risk.”

Paul Baiocchi, head of fund sales and strategy at SS&C ALPS Advisors, joined the panel. Douglas Daly, managing director and portfolio manager at CoreCommodity Management, also participated. Nelson Louie, CoreCommodity’s senior commodities portfolio manager, rounded out the group.

Most investors are likely far more underweight natural resources than they realize, according to Baiocchi. Energy and materials companies now make up less than 8% of the MSCI All Country World Index, he said. They account for less than 10% of the MSCI EAFE Index as well.

In the late 1970s, commodity producers made up roughly 35% of the S&P 500. Today that figure sits at around 5%, Daly said. Meanwhile, the seven largest technology companies now represent about one-third of the index.

The structural case for commodities rests on several long-term forces. World population has grown from 5.3 billion in the 1990s to 8.3 billion today, Louie said. The UN projects it will reach 9 billion by 2050. Investment in new production has also lagged badly behind demand. Daly noted that a copper mine can take 15 years from planning to production. Current spending is not on pace to close anticipated supply deficits by decade’s end.

Geopolitical pressure is compounding those dynamics. At its narrowest, the Strait of Hormuz spans just 20 miles. It handles more than 25% of the world’s seaborne oil trade, Louie said. The conflict in Iran has triggered backwardation in oil futures. That is when near-term contracts trade at a premium to longer-dated ones, a sign of tight immediate supplies.

Commodities ETF Leans on Upstream Exposure

The ALPS Core Commodity Natural Resources ETF (CCNR) centers on upstream companies, meaning exploration and production firms and oilfield services businesses that track most closely to underlying commodity prices, Daly explained. Downstream operations such as refiners are excluded from the portfolio.

The fund typically holds around 300 names. The top 10 account for 12% to 15% of assets, according to Daly. Active share runs around 90%. The expense ratio is 39 basis points, which Baiocchi said is below comparable passive strategies.

CCNR also includes steel producers and timber companies often absent from futures-based commodity indexes.

Baiocchi said the Iran conflict highlights a broader shift: countries dependent on the Strait of Hormuz for energy transit will now face pressure to reroute infrastructure, generating demand for steel, pipeline capacity, and other raw materials.

Saudi Arabia has an existing pipeline capable of moving 7 million barrels per day that is likely to be expanded, he said. The UAE already has a pipeline that bypasses the Strait entirely, and that too is expected to grow.

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