How to Invest in Natural Resources: Diversify Your Portfolio from the Ground Up

Natural Resources Come in Many Different Forms

Natural resources include traditional commodities like oil and gas, base and precious metals, as well as technologies and materials supporting the multi-decade transition to renewables. This expansive boundary offers a far-ranging opportunity set stretching well beyond traditional commodity markets.

From an investment perspective, VanEck classifies global natural resources into the following categories: renewables & alternatives, base & industrial metals, gold & precious metals, oil & gas, agriculture, paper & forest, and industrials & utilities.

Investment Benefits of Natural Resources: Inflation Protection, Diversification and Access to Global Growth

Historically, global resources and commodity investments have been an excellent way to diversify broader stock and fixed income portfolios, hedge against inflation and gain access to the key secular trends powering global economic growth.

• Inflation hedge: On average, resource equities have outperformed traditional asset classes – such as U.S. stocks and bonds – in even modest inflationary periods (2-6%).
• Diversification benefits: Natural resources offer strong diversification benefits due to their low correlation with traditional assets like stocks and bonds. When the stock market is volatile or economic conditions change, commodities often behave differently, providing a stabilizing effect on your portfolio. For instance, during economic downturns, while stock prices may plummet, commodity prices like gold can remain stable or even increase, offering a cushion against market shocks.
• Global growth: Natural resources’ critical role in powering growth—whether through traditional and renewable energy, emerging markets, or the AI-driven demand for electricity—positions them as key beneficiaries of global expansion.

Resource Equities Have Outperformed in Inflationary Periods

With unsustainable government spending and rising deficits, the potential for inflationary pressures remains high. Historically, on average, once inflation has breached 5%, it has taken 18 years to get back to 2% or lower. Commodities and real assets have served as effective inflation hedges during previous inflationary periods, outperforming traditional equities and bonds.

Source: VanEck, Bloomberg, CRSP, FactSet, World Bank. Data as of December 2024. “Diversified Miners” represented MSCI ACWI Select Metals & Mining Producers ex. Gold & Silver Index “Energy Producers” represented by MSCI ACWI Select Energy Producers Index “Gold Miners” represented by NYSE Arca Gold Miners Index “REITs” represented by FTSE NAREIT All Equity REITs Index “U.S. Bonds” Bloomberg U.S. Aggregate Bond Index “U.S. Equities” represented by S&P 500 Index. Past performance is no indication of future results. Index performance is not representative of fund performance. It is not possible to invest directly in an index. Index descriptions included at the end of this presentation.

Natural Resources Offer Diversification Amid Heavily Concentrated Equity Indexes

While the U.S. stock market has many things going for it—profit growth, a strong economy, low unemployment—valuations are high and recent performance has been dominated by a handful of mega-cap technology companies, i.e., the so-called “Magnificent Seven.” Commodities, particularly precious metals like gold, have historically exhibited a low correlation with stocks and bonds, offering portfolio resilience during market downturns. In addition, unlike the concentrated technology-heavy equity markets, natural resource investments provide exposure to tangible, real assets, which can enhance diversification.

Tapping into Global Growth

From traditional commodities like oil and gas to the ongoing transition to renewables, global resources represent the foundation of economic activity.

Emerging Markets and Industrialization

Emerging markets, particularly in Asia, are experiencing significant economic growth, driving the demand for natural resources. As these countries continue to industrialize and urbanize, the need for infrastructure development, manufacturing, and energy increases. This surge in demand is particularly evident in:

• Metals: Iron ore, copper, and aluminum are crucial for construction, electronics, and transportation industries. China's infrastructure projects, including railways, highways, and urban developments, have significantly increased the demand for these metals.
• Energy: Traditional energy resources like oil and natural gas remain vital for powering industries and transportation. India's expanding economy has led to a higher consumption of fossil fuels to meet its growing energy needs.
• Agricultural Products: As populations grow and incomes rise, dietary patterns change, increasing the demand for diverse agricultural products. For instance, China's rising middle class has led to higher consumption of meat, driving up the demand for feed grains like soybeans and corn.

U.S. Energy Demand & AI Boom

The rise of artificial intelligence and data centers is driving demand for natural gas and nuclear energy as reliable power sources. As AI computing expands, so will the need for stable, large-scale energy solutions. In fact, markets may be underestimating the significant power requirements commanded by AI technologies (and the resources required to sustain that growth).

Power Demand Needs Are Growing Due to AI

Global Data Center Electrical Power Demand (TWh)

Source: Goldman Sachs (via Masanet et. al, 2020, IEA, Cisco and Goldman Sachs Global Investment Research). Data as of December 2023.

Resources Transition: Inevitable, but a Long Way to Go

The global shift towards renewable energy and sustainable technologies is another critical factor driving the demand for specific natural resources. Electrified transport (including electric vehicles) and energy storage, among others, are likely to contend as major drivers of the resources transition alongside renewables, in our view.

Global Investment in Resource Transition is Increasing ($ Billion)

Source: BNEF; IRENA. Data as of December 2023. Note: start years differ by sector, but all sectors are present from 2020 onwards. ^*IRENA projected investment needed to keep rising global temperatures to well below 2 degree Celsius (°C) and towards 1.5°C during this century.

Supply Constraints and Investment Opportunities

While the demand for natural resources continues to grow, supply constraints pose challenges and create investment opportunities. Key supply-side factors include:

• Mining Challenges: Extracting minerals and metals from the earth is becoming increasingly difficult and costly. Deeper mines, lower ore grades, and stricter environmental regulations are some of the factors contributing to these challenges. Investors can capitalize on companies that innovate in mining technologies or hold high-quality resource deposits.
• Agricultural Disruptions: Climate change, extreme weather events, and diseases can significantly impact agricultural production. These disruptions can lead to supply shortages and higher prices for agricultural commodities. Investing in agricultural technologies, such as drought-resistant crops or precision farming, can provide exposure to potential gains from these challenges.

Risk Considerations

Investing in natural resources comes with a unique set of risks. Commodities tend to be more volatile than other asset classes due to factors like weather conditions, geopolitical tensions, and changes in supply and demand. For example, political instability in oil-producing regions can lead to sharp spikes in oil prices. Additionally, commodities markets can be less liquid than stock markets, making it harder to buy and sell assets quickly without affecting their prices. Understanding these risks is crucial before adding natural resources to your portfolio.

Ways to Invest

There are several ways to invest in natural resources:

• Buy Physical Commodities: This involves purchasing the actual commodity, such as gold bars or agricultural products. While it offers direct exposure, storage and security can be challenging.
• Invest in Companies: Buying stocks of companies involved in the extraction, production, and distribution of natural resources, such as mining firms or oil companies, provides indirect exposure to commodity prices.
• Futures Contracts: These financial instruments allow you to agree to buy or sell a commodity at a future date and price, providing leverage and potentially higher returns, but also higher risk.
• ETFs and Mutual Funds: These funds pool investor money to buy a diversified portfolio of commodities or commodity-related companies, offering a more manageable way to gain exposure to natural resources with professional management.

Incorporating natural resources into your investment portfolio can offer significant benefits, including diversification, inflation protection, and the potential to capitalize on global growth trends. However, it is essential to be aware of the risks involved and to choose the appropriate investment method based on your risk tolerance and investment goals. By carefully considering these factors, you can effectively leverage natural resources to enhance and diversify your investment portfolio.

VanEck Natural Resources and Commodities Solutions

VanEck has a history of investing in natural resources and commodities for over 50 years, offering investors actively and passively managed strategies, from physical commodities to natural resource equities. We offer specialized exposure to individual sectors and diversified solutions with broad exposure across sectors and industries.

More information, including recent performance and current holdings, can be found by clicking the fund names below:

Global Resources Fund: Actively-managed approach to companies with unique competitive advantages associated with traditional commodities and those leading the development of emerging resource applications and technologies.

International Investors Gold Fund: Proven fundamental, bottom-up process emphasizes stock selection based on industry experience to access opportunities across the gold mining sector.

CM Commodity Index Fund: A passively managed fund that offers diversified commodities exposure by spreading its exposure across multiple maturities and maintaining a constant maturity per commodity to mitigate the impact of negative roll yield.

CMCI Commodity Strategy ETF: A passively managed ETF that spreads its exposure across multiple maturities to offer diversified exposure and mitigates the impact of negative roll yield by maintaining a constant maturity per commodity.

VanEck Oil Refiners ETF (CRAK): Provides exposure to an industry that may generally benefit from lower oil prices, a segment that has historically interacted differently with oil prices and market dynamics than other energy segments.

VanEck Energy Income ETF (EINC): Offers exposure to MLPs and energy infrastructure companies that have historically exhibited attractive yield characteristics without burdensome K-1 tax reporting.

VanEck Gold Miners ETF (GDX): The nation's first ETF that offers direct exposure to the gold mining industry, which may provide leverage to rising gold prices.

VanEck Junior Gold Miners ETF (GDXJ): Access to junior gold miners, including smaller exploratory or early development phase companies that are responsible for many gold reserve discoveries worldwide.

Green Metals ETF (GMET): Capture companies involved in the production of the metals that enable the energy transition from fossil fuels to cleaner energy sources and technologies.

VanEck Natural Resources ETF (HAP): Offers exposure to global companies involved in six natural resources segments (including agriculture, energy, metals and renewable energy).

VanEck Agribusiness ETF (MOO): Positioned to meet growing demand as global population growth is driving increasing food demand and the need for efficient agricultural solutions.

VanEck Uranium and Nuclear ETF (NLR): Access to an important segment of the nuclear energy market, which is a significant clean energy source at an inflection point from increasing demand.

VanEck Oil Services ETF (OIH): Invests in highly liquid companies in oil services industry, including both domestic and U.S. listed foreign companies, allowing for enhanced industry representation.

VanEck Merk Gold ETF (OUNZ): Provides investors with a convenient and cost-efficient way to invest in gold through shares with the option to take physical delivery.

VanEck Real Assets ETF (RAAX): Comprehensive allocation strategy that invests across real assets and seeks to reduce volatility by responding to changing market environments.

VanEck Rare Earth and Strategic Metals ETF (REMX): Provides access to the rare earth or strategic metals industry, which supplies key inputs to many of the world’s most advanced technologies.

VanEck Steel ETF (SLX): Access to the steel industry, an industry supporting global industrialization and economic expansion.

VanEck Low Carbon Energy ETF (SMOG): Exposure to low carbon energy that includes not only solar, wind and hydro companies, but also in more recently developing areas of the market such as electric vehicles, battery tech, hydrogen and fuel cells.

VanEck Commodity Strategy ETF (PIT): Actively managed exposure to a broad basket of commodity futures.