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It may not sparkle or shine, but fertilizer has a bright future. In this exclusive interview Bruno del Ama tells why investors should be looking at this growing industry and how his company’s new global fertilizer a..

28 Sep 2011

It may not sparkle or shine, but fertilizer has a bright future. In this exclusive interview with The Energy Report, Bruno del Ama , CEO of Global X Funds, tells us why investors should be looking at this growing industry and how his company’s new global fertilizer and potash ETF (NYSE:SOIL) provides a great vehicle for profit. He also tells us why his company’s gold and silver mining ETFs are poised to catch up with precious metal market performance.

Companies Mentioned: CF Industries Holdings Inc. — Global X Fertilizers/Potash ETF — Global X Pure Gold Miners ETF — Global X Silver Miners ETF — Intrepid Potash Inc. — Scotts Miracle-Gro Co. — Sociedad Qumica y Minera de Chile S.A. — Terra Nitrogen Co. L.P. — The Mosaic Company

The Energy Report: Thank you for joining us this morning, Bruno. Before we get into the details of Global X Fertilizers/Potash ETF (SOIL:NYSE), let’s discuss ETF basics and how they operate.

Bruno del Ama: Certainly. Exchange traded funds (ETFs) are fairly similar to traditional mutual funds. Their name indicates their main differencethey actually trade on an exchange like any other stock. ETFs have been one of the fastest-growing segments in the financial services industry. That’s due to many of the benefits ETFs offer, such as low cost, transparency and tax efficiency.

TER: This really is a proliferating field. It seems like every time we turn around there’s a new ETF. What factors does Global X Funds consider when developing an ETF for a particular sector?

BdA: We focus on three very important factors when we decide to bring new products to market. The first starts with the global macro trends. What are the big themes that are shaping the world? Our products have to fit into those very long-term secular trends that will continue to drive performance.

The second one is that it has to be unique and differentiated. So, if you look at the lineup of Global X Funds, there are essentially no products like them. And thirdly, the products in the ETF package must make sense and provide good access to the type of market that we’re considering.

TER: How long has Global been managing ETFs?

BdA: We brought our first ETF to market in February 2009, and we have been ranked by BlackRock as one of the fastest-growing ETF companies in the world. We currently have about $1.5 billion (B) in assets under management and have been ranked by our peers both in Europe and the U.S. as the most innovative ETF company in North America.

TER: What are the advantages for investors buying an ETF versus other investment vehicles?

BdA: The main reason why ETFs have been very popular is their low cost. Their management fees are much lower than those of comparable mutual funds. ETFs also don’t have the loads, distribution and short-term redemption charges that mutual funds typically incur. They’re very cost efficient.

Essentially, what ETFs do is bring institutional-like expense ratios to the retail investor. However, about half of the user base for ETFs is institutional so these products have to work well for both investor classes. The retail investor can essentially piggyback off the institutional investor and get access to the exact same expense loads. That has been a huge driver of growth.

Innovation, as you point out, has been another driver of growth. The fact that you can get access to areas of the world that were very difficult to access before is a huge benefit. For example, we have a whole suite of China sector funds. So, if you have a particular view on the China consumer segment, that’s something that you can now place targeted bets on, which was very difficult, if not impossible before ETFs emerged.

The third benefit of ETFs is their tax efficiency. Additionally, market volatility has made the liquidity ETFs offer very appealing. If you have the market swinging up or down 300 basis points on any given day, you can come in at 11:00 a.m. and you then sell your shares at 3:00 p.m.

Transparency is yet another benefit of ETF investment. One of the problems in the market in 2008 was that a lot of investors in mutual funds didn’t know exactly what they owned. In our case, as well as with most ETFs, you can go into our website and see all of the holdings updated daily for any particular ETF.

TER: Typically, how much trading occurs in these funds?

BdA: Essentially 90%95% of ETFs are what’s called passive funds. They track indexes developed and maintained by a third-party, such as Standard & Poor’s, Dow Jones, FTSE, etcetera, and those indexes don’t change very often. They’re typically rebalanced two or four times a year.

There’s not a lot of trading that takes place. Of course, you could have corporate actions within a quarter where a couple of companies within the index merge or there’s a spinoff. There’s some amount of trading that happens inter-quarter between rebalance dates, but these funds provide exposure to a complete market in a passive way.

TER: So why did you start this particular potash and fertilizer ETF?

BdA: The only way to invest in the fertilizers/potash market is to buy individual stocks, most of which actually trade on foreign exchanges. This ETF allows investors to get diversified exposure to the whole fertilizers/potash sector, including stocks from 15 different markets, including Israel, Australia and China, to name a few.

We had received inquiries from institutional investors looking for a simple and cost-effective vehicle to invest in the fertilizer/potash market. These investors are driven by the significant growth in the food and agro business market. Fertilizers are the nutrients that farmers require to increase crop yields, and as such, they are the first link in the global food supply chain.

TER: What are your growth expectations for this sector?

BdA: The prospects for continued growth in the fertilizer/potash business are very compelling. Purchasing power growth and the result of diet shifts in emerging markets are driving crop usage from grains toward high-protein feed, fruits and vegetables, which require about double the average application rate of fertilizers. The resulting growth in crop yields is enormous. For example, grain yields in India are less than one-half of those in the U.S. with lack of proper fertilization being the key reason.

TER: So the big markets are overseas. Is the North American market relatively saturated in terms of fertilizer usage?

BdA: Yes and no. I wouldn’t call it saturation, because the U.S. is a big farming country and you continue to see growth in farming. But, certainly from a fertilizer use perspective, the U.S. is a much more efficient market and so the penetration of fertilizer is very high. Emerging markets such as India have low penetration of fertilizer, so there’s a lot of catching-up that has to take place.