Is It Time to Buy Energy?

iShares North American Natural Resources (IGE) seeks to provide investment results that correspond to the performance of the S&P North American Natural Resources Sector Index. It provides a hedge against inflation because these companies find it easier to pass on cost increases to end-users.

The fund invests at least 90% of its assets in securities of the underlying index and depositary receipts representing securities of the underlying index.

It measures the performance of U.S.-traded stocks of natural resource-related companies in North America.

Sectors include energy, materials, metals and mining and oil and gas companies. The top 10 holding represent 44.23% of total portfolio, and the list includes the following companies: Exxon Mobil (XOM), Chevron (CVX), Schlumberger (SLB), ConocoPhillips (COP), Occidental Petroleum (OXY), Kinder Morgan (KMI), EOG Resources (EOG), Phillips 66 (PSX), Suncor Energy (SU) and Anadarko Petroleum (APC).

Value at Risk

Through the VaR calculus, we try to measure the potential risk of investing in natural resource companies. Let's have some theory first. VaR is a probabilistic method of measuring the potential loss in portfolio value over a given 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. In other words, 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 period over which VaR will be measured. It is used a one-day period.

Among the several methods, we look at the Monte Carlo Simulation, which generates hundreds, thousands or even millions of possible outcomes from the distributions of inputs specified by the user.

Suppose 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 $60,595,848 or more, a 3.3% of the portfolio value. We could also say that there is a 99% chance that on any given day the portfolio will experience either a loss less than $60,595,848 or a gain. Looking at a greater horizon, the two-week 1% VaR is at $191,620,896 or 10.6% of the portfolio value.

Final Comment

This ETF has experienced a sharp correction, the fund has generated a total return of 1.64% in the last five years, -4.22% in the last three years and -34.23% in the last year, but it is likely a future scenario with oil prices up and this ETF might be attractive for investors.

Published on Sep 10, 2015
By Omar Venerio
Capital Markets, Derivatives and Financial Management Professor, Master in Finance and CFA candidate. I am an independent trader of stocks and options and passionate about the stock market.

Copyrighted 2020. Content published with author's permission.

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