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As Published by State Street Global Advisors

Why Invest in Global Natural Resources? Diverse sectors drive economic growth, yet much of their activity relies on basic raw materials. Investing in these resources—which may experience rising prices due to scarcity —can provide attractive benefits to investment portfolios. Yet the breadth of natural resources is not well-represented in the major indexes, nor are they captured effectively by narrower indexes. Accordingly, investor portfolios may benefit from a way to add precise exposure to global natural resources.

The case for investing in global natural resources rests on:

– Attractive supply-demand dynamics

– Opportunity to participate in cyclical economic expansion – Diversification

– Potential hedge against inflation

Defining Natural Resources:

Natural resources are raw materials that exist on the earth in their original form without human intervention. Some are renewable (such as timber and agriculture), subject to consumption, but can also be replenished. Others, such as oil, natural gas, precious metals and minerals, are non-renewable and subject to depletion. Human demand dictates the value of these resources, providing sources of wealth for those with ownership stakes in them.

Despite rising demand, the supply of natural resources is limited. Because we have not discovered how to create (or significantly replace the demand for) resources such as oil, gas, minerals and metals, the challenge remains to discover alternatives to these resources, or to embrace conservation and use them more effectively. Companies and national governments have yet to invest extensively in either approach. The 2010 oil rig explosion in the Gulf of Mexico highlighted the issue of limited supply. Trying to keep up with demand companies are being forced to target less-accessible reserves, using more expensive and riskier methods of extraction. Fortunately for investors in global natural resources, brisk demand often allows providers of raw materials to keep their profit margins high, despite rising costs.

As an investment category, the definition expands to include industries that extract, manufacture, bring to market, and otherwise service natural resources. These industries fall into three distinct categories: energy, metals and mining, and agriculture. Each tends to protect an investor’s purchasing power against inflationary trends.

However, each of these categories presents somewhat different characteristics. They react with varying intensity to positive and negative events in world markets as well as inflationary and deflationary cycles.

Rising energy prices are typically cited as a key inflationary factor. While most raw material prices rise with inflation, energy prices may not rise uniformly. Oil drilling/exploration typically leads energy prices. Prices of other energy components may lag. This is especially true of natural gas or coal, which may be subject to government influence. Production costs typically establish floors under energy prices, otherwise prices may also be influenced by seasonality. For example, crude oil experiences high demand/lower prices in winter and the reverse in summer.

Historically, oil and gas have experienced higher volatility than most other equity investments. However, when added to a portfolio they may decrease overall risk because of their lower correlations with other portfolio holdings. They may also potentially enhance long-term returns. Gaining access to these commodities through stocks—rather than through direct commodity investments—may moderate the volatility, but it also potentially reduces the benefits of lower correlation.

Metals & Mining:

Like energy stocks, metals and mining stocks also act as an inflation hedge. Some of the companies in this sector are highly capital-intensive. These include extraction (diversified metals, precious metals, gold) and fabrication (aluminum, steel) operations. These companies confront long time horizons, price and volume fluctuations, and little ability to differentiate their product. In mining, there are additional geopolitical risks that come from the need to mine where the materials are. However, these companies benefit from the continued demand for raw and fabricated materials.

An even greater appeal of metals and mining is the indirect exposure to emerging economies that this export-oriented sector offers. Equity investment in these resource companies provides a proxy for the current growth of the emerging markets driving demand for the products of metals and mining companies. Equity investments in companies listed in developed countries allows participation in this growth, without direct exposure to emerging markets’ cultural and governmental risks.

Agriculture:

Agricultural products (including fertilizers, chemicals, forest, and paper products) respond directly to supply and demand dynamics. The global population is expected to grow by more than one-third to 9 billion by 2050. This growth demands more food. To produce more food we need more of the agricultural components that help to produce grains, livestock feed, and our own cereals.

Agriculture also provides the ability to participate in emerging economies. For example, as an emerging Chinese middle class grows, it consumes more meat, raising livestock prices, and, in turn, increasing demand (and prices) for grain.

Uniquely, the agriculture cluster can yield upward price contributions through inflation/deflation cycles. Consumers tend to absorb almost 100% of basic food price increases, cutting back in other areas. But agricultural stocks may appreciate even in deflation, when most other asset prices drop. The worldwide demand for food staples sustains upward pressure on basic food prices, even as incomes fall.

Access To Timber:

Compared to other natural resource inflation hedges, timber prices tend to be less volatile. There are no new timber fields to be discovered (as with oil), forests replenish, and demand remains strong. In recent decades, insurance companies and pensions have pioneered the institutional use of timber as a hedge against inflation.

The Potential Benefits Of An Equal Allocation Among Energy, Metals & Mining, And Agriculture:

Many investment products created to focus on natural resources have tended to weight heavily the energy sector, with its potential to benefit from demand for oil and gas. When investors add such investments to their portfolio, they risk unknowingly overweighting energy companies, which make up about 12.68% of the S&P 500 Index in terms of market capitalization (as of June 30, 2011). Indeed, Exxon and Chevron rank first and fourth in the S&P 500 Index as of June 30, 2011.

We believe that investors creating truly diversified portfolios will look for natural resource exposure that is liquid, precisely balanced, and broadly, globally diversified. For this reason, the S&P Global Natural Resources Index is equal-weighted across three segments: energy, metals and mining, and agriculture stocks.

SPDR S&P Global Natural Resources ETF [GNR]:

The SPDR S&P Global Natural Resources ETF [GNR] equally divides its holdings among the three components of the S&P Global Natural Resources Index. This means it consists of three equal-weighted clusters, each holding the cluster’s 30 largest securities, by market cap. The ETF will be rebalanced quarterly and reconstituted annually to maintain this equal weighting. Each cluster’s industries appear in Figure 3. This equal weighting—and broad exposure across industries —should help moderate volatility from an individual industry or company. Only industries related to natural resources are included in each cluster.

The ETF will emphasize large-cap stocks. To maximize liquidity, its holdings must have a market capitalization above $1 billion. Individual stocks’ weightings will be driven by their market capitalization. However, no single stock can account for more than 5.0% of the Index.

For geographic diversity—as well as risk management—the total weight of U.S. stocks is capped at 40.0% and emerging market stocks are capped at 15.0% of the Index.

The SPDR S&P Global Natural Resources ETF cluster and industry allocations, market capitalization and region allocations are shown as of June 30, 2011 in Figures 4 and Figure 5.

The ETF’s holdings consist of roughly 87.0% stocks in the world’s developed markets and roughly 92.0% of large-cap stocks (See Figure 5).

GNR’s relatively large market capitalization should moderate volatility and help the liquidity of the holdings. These large-cap, developed market stocks offer indirect exposure to emerging market growth because these industry leaders are providing the raw materials for growth to the emerging economies. Emerging markets drive demand for energy, timber, and raw materials.

Who Should Invest?:

− INVESTORS SEEKING PRECISE, WELL-DIVERSIFIED EXPOSURE TO GLOBAL NATURAL RESOURCES: The ETF provides exposure to a diverse set of stocks across sectors and industries involved with global natural resources.

− INVESTORS SEEKING AN ECONOMICAL, EASY INVESTMENT IN GLOBAL NATURAL RESOURCES: The ETF offers a one-trade allocation to the breadth of global natural resources. Its management fee is at least 50.0% less than an open-end mutual fund pursuing the same exposure.

− INFLATION-WARY INVESTORS: The historical characteristics of global natural resources suggest this ETF may be attractive for investors seeking inflation protection.

− GLOBAL NATURAL RESOURCE FOCUSED INVESTORS looking for a cost-effective core position to which it can add satellite over-allocations to energy, commodities, metals, timber, or other industries.

Diversification:

A risk-management technique that mixes a wide variety of investments within a portfolio. The rationale contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio. It strives to smooth out events in a portfolio so that the positive performance of some investments will neutralize the negative performance of others. Diversification does not ensure a profit or guarantee against a loss.

I NDEX DEFINITIONS

Dow Jones-UBS Commodity Index:

The Dow Jones-UBS Commodity Index aims to provide broadly diversified representation of commodity markets as an asset class. The index is made up of exchange-traded futures on physical commodities.— The index represents 19 commodities, which are weighted to account for economic significance and market liquidity.

MSCI EAFE Index:

The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. The MSCI EAFE Index consisted of the following 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.

S&P 500 ® Index:

The S&P 500 Index is composed of 500 selected stocks, all of which are listed on the Exchange, the NYSE or NASDAQ, and spans over 24 separate industry groups. Since 1968, the S&P 500 Index has been a component of the U.S. Commerce Department’s list of Leading Indicators that track key sectors of the U.S. Economy. Current information regarding the market value of the S&P 500 Index is available from market information services. The S&P 500 Index is determined, comprised and calculated without regard to the Trust.

S&P Energy Select Sector Index:

The companies included in each Select Sector Index are selected on the basis of general industry classification from a universe of companies defined by the Standard & Poor’s 500 Composite Stock® Index (S&P 500®). The nine Select Sector Indexes (each a Select Sector Index) upon which the Select Sector SPDR Funds are based together comprise all of the companies in the S&P 500. The Energy Select Sector Index includes companies from the following industries: oil, gas & consumable fuels and energy equipment & services.

S&P Global Natural Resources Index:

The S&P Global Natural Resources Index is comprised of 90 of the largest U.S. and foreign publicly traded companies, based on market capitalization, in natural resources and commodities businesses (as defined below) that meet certain investability requirements. The Index component securities represent a combination of the component securities included in each of the following three sub-indices: the S&P Global Natural Resources—Agriculture Index, the S&P Global Natural Resources—Energy Index and the S&P Global Natural Resources—Metals and Mining Index. The maximum weight of each sub-index is capped at one third of the total weight of the Index. Membership in the Index is based on industry sector according to the Global Industry Classification Standard (GICS»). Companies in natural resources and commodities businesses include those significantly engaged, directly or indirectly, in the following industries: agricultural, forest and paper products; fertilizers and agricultural chemicals; paper packaging; timber real estate investment trusts (REITs); integrated oil and gas; oil and gas drilling; oil and gas exploration and production; oil and gas refining and marketing; coal and consumable fuels; diversified metals and mining; steel; aluminum; gold; and precious metals and minerals.

S&P GSCI ® Index:

The S&P GSCI Commodity Index: The S&P GSCI provides investors with a reliable and publicly available benchmark for investment performance in the commodity markets. The S&P GSCI is also designed to be a tradable index, readily accessible to market participants and cost efficient to implement. The index is calculated primarily on a world production-weighted basis and is comprised of the principal physical commodities that are the subject of active, liquid futures markets. As a result, the index is widely recognized as a leading measure of general price movements and inflation in the world economy. In order to reflect the performance of a total return investment in commodities, Standard & Poor’s calculates four separate but related indices based on the S&P GSCI and a number of sub-indices representing components of the S&P GSCI. The composition of the S&P GSCI is reviewed on a monthly basis.

S&P North American Natural Resources Sector Index:

The Index has been developed as an equity benchmark for U.S.-traded natural resource related stocks. The Index includes companies in the following categories: extractive industries, energy companies, owners and operators of timber tracts, forestry services, producers of pulp and paper, and owners of plantations. It is a modified capitalization-weighted index and component companies must meet objective criteria for inclusion. Reconstitution is semi-annual.

Source: This article was originally published in A Case For. Global Natural Resources, (SPDR State Street Global Advisors) www.spdru.com.

© 2011 State Street Corporation. All Rights Reserved. IBG-4540 Exp. Date: 8/31/2012 IBG.CF.GNR.0811