Oil Volatility, Hormuz Tensions Drive Flows to Upstream ETF

A VettaFi webcast on Tuesday highlighted rising investor interest in upstream commodity exposure after recent tension near the Strait of Hormuz and a shift in oil futures toward backwardation. The discussion pointed to the ALPS Core Commodity Natural Resources ETF (CCNR) as a vehicle drawing inflows; the fund holds roughly 300 companies and carries an expense ratio of 39 basis points.

The webcast, titled “Hard Assets in a Hard World: Commodities in the Era of Geopolitical Risk,” was moderated by Roxanna Islam of VettaFi. Panelists included Paul Baiocchi of SS&C ALPS Advisors and Douglas Daly and Nelson Louie of CoreCommodity Management.

Panelists said many investors hold smaller allocations to natural resources than expected. Energy and materials stocks account for under 8% of the MSCI All Country World Index and less than 10% of the MSCI EAFE Index. Commodity producers make up about 5% of the S&P 500 today, down from roughly 35% in the late 1970s. The seven largest technology companies now represent about one-third of the S&P 500.

Speakers cited long project lead times and low recent investment in new mines and energy projects as supply-side concerns. World population rose from about 5.3 billion in the 1990s to about 8.3 billion today, and the United Nations projects roughly 9 billion by 2050, Nelson Louie noted. Daly pointed out that developing a copper mine can take as long as 15 years from planning to production, and current spending trends are not expected to close projected supply gaps by the end of the decade.

Geopolitical risks have tightened near-term oil markets, the panel said. The Strait of Hormuz narrows to about 20 miles at its tightest point and handles more than a quarter of global seaborne oil trade. Recent conflict involving Iran has pushed oil futures into backwardation, a structure in which near-term contracts trade at a premium to longer-dated contracts and that market participants often view as a signal of tighter immediate supply.

CCNR focuses on upstream companies such as exploration and production firms and oilfield services businesses, excluding refiners and other downstream operators. The fund typically holds around 300 names. Daly reported that the top 10 holdings make up about 12% to 15% of assets and that active share runs near 90%.

Panelists also noted that CCNR includes producers of steel and timber that are often missing from futures-based commodity indexes. The group discussed likely infrastructure responses to Strait of Hormuz risks: Saudi Arabia operates a pipeline capable of moving about 7 million barrels per day that could be expanded, and the United Arab Emirates has a bypass pipeline that is expected to grow. Those projects could increase demand for steel and other pipeline materials.

During the webcast, speakers framed recent market moves as reflecting demographic growth, limited new production investment, long project lead times and heightened geopolitical risk, and they presented upstream-focused commodity ETFs like CCNR as a way to gain exposure to companies tied to commodity extraction and services rather than to futures-only or downstream strategies.