Moving Upstream GUNR THE CASE FOR GLOBAL UPSTREAM NATURAL RESOURCES RISK MANAGEMENT
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1 THE CASE FOR GLOBAL UPSTREAM NATURAL RESOURCES Moving Upsream GUNR RISK MANAGEMENT A key consideraion for invesors is he disincion beween he upsream and downsream componens of he naural resource supply chain. Wih growing populaions and increasing per-capia income, global markes are in he early sages of wha is expeced o be an exended period of demand expansion for energy, food producs, meals and oher naural resources such as paper and waer. These are he building blocks of flourishing economies. Invesors can paricipae in he benefis of rising prices of raw inpu maerials via exposure o naural resources. These invesmens offer he addiional poenial advanage of offseing some of he longer-erm inflaionary effecs of economic expansion in emerging and esablished regions. A CLOSER LOOK AT NATURAL RESOURCES Naural resources can generally be grouped ino five caegories, four of which are fairly well known plus one new caegory ha is gaining imporance wih invesors. 1. Energy: Mos invesors know his naural resource group well. Raw or upsream naural resources include crude oil and naural gas, and processed or downsream commodiies include naural gas liquids, heaing oil and gasoline. 2. Agriculural: These include grains such as corn and whea, soybeans, livesock, and sof producs such as coffee and cocoa. 3. Meals: Precious meals include gold, silver and plainum. In addiion, indusrial meals such as copper, nickel and aluminum provide he skeleal framework for an economy. 4. Fores: The fores is he ulimae renewable naural resource of imberlands used for building and paper producs. 5. Waer: The newes commodiy o be regarded as an asse class is waer. World populaion and wealh growh have fueled demand for food and poable waer hrough waer righs, delivery and reamen. A fundamenal building block of life, waer is aracing heighened aenion due o shorages of poable supplies in many geographic areas, se agains rising waer demand from consumer, farming and indusrial users. flexshares.com The Case for Global Upsream Naural Resources 1 of 5
2 A focused invesmen in he upsream segmen of specific resource supply chains may help invesors o opimize exposure o naural resources. THE NATURAL RESOURCES SUPPLY CHAIN A key consideraion for invesors is he disincion beween he upsream and downsream componens of he naural resource supply chain. The upsream segmen refers o he very beginning of he supply chain, where he resources are in he ground. These resources can be naural gas fields in Oklahoma, acres of fores in rural Florida, fields of soybeans in Brazil or an aquifer in Saudi Arabia. The value o invesors in he upsream segmen is he marke or fuures price of he resource less he coss over ime o exrac he resource, process and deliver i o he downsream segmen of he supply chain. In he downsream segmen, he resource is processed ino inermediae or finished goods for delivery ino he commercial or consumer UPSTREAM markes. Companies operaing in he downsream segmens, afer having paid for he Exrac and deliver naural resources resource, face innumerable challenges in dealing wih packaging, disribuion, markeing, branding, changing consumer ases and oher facors ha can impac heir profiabiliy and INTEGRATED cash flows. Ownership ineress in upsream naural Combined upsream and resources segmens offer invesors profiabiliy downsream operaions benefis from naural resource price increases, while he same price increases have a negaive impac on he downsream segmen of he supply chain (i.e., he cos of goods sold DOWNSTREAM increases and operaing margins decrease for companies ha are price akers on naural Process resources ino finished goods for he consumer marke resource supplies). A focused invesmen in he upsream segmen of specific resource supply chains may help invesors o opimize exposure o naural END-USER MARKET resources. The FlexShares Morningsar Global Upsream Naural Resources Index Fund (icker: GUNR) has been designed o provide his exposure, using an insighful, rules-based mehodology. An invesmen in he Fund is subjec o invesmen risk, including he possible loss of principal amoun invesed. The Fund is subjec o he following risks: asse class; commodiies; concenraion; currency; derivaives; emerging markes; foreign securiies; global naural resources indusry; issuer; managemen; marke rading; non-diversificaion; passive invesmen; small cap sock; and racking error risk. Please see he prospecus for a complee descripion of risks. In addiion, he FlexShares Morningsar Global Upsream Naural Resources Index Fund is subjec o he global naural resource indusry. As he demand for or prices of naural resources increase, he Fund s equiy invesmen generally would be expeced o also increase. Conversely, declines in demand for or prices of naural resources generally would be expeced o cause declines in value of such equiy securiies. Such declines may occur quickly and wihou warning and may negaively impac your invesmen in he Fund. flexshares.com The Case for Global Upsream Naural Resources 2 of 5
3 ESTABLISHED NATURAL RESOURCES INVESTMENT OPTIONS Opions Wha s involved Consideraions Direc invesmen in physical commodiies Possession of he physical naural resource produc. Transporaion, handling and sorage issues (i.e., how does he average invesor sore one million cubic fee of naural gas?). Fuures Many naural resource commodiies have liquid, radable fuure conracs ha are available o qualified fuures invesors. Fuures address he challenges regarding physical ownership, unless he invesor holds he fuures conrac unil mauriy and hen expecs o ake delivery of he physical commodiy. Expiring shor-daed conracs or invesmens in volaile, illiquid, long-daed conracs are consanly rolling over. Boh are subjec o iniial margin posings, ongoing margin calls and poenially high levels of marke price volailiy and/or dislocaions from acual cash marke prices. A. Naural resources fuures exposure via ETFs ha inves in near-erm fuures conracs aemping o rack he spo price of a commodiy. Complexiy and aypical fuures marke dynamics have he poenial o cause fuures-based invesmen opions o fall shor of saed objecives. The rolling of near-erm fuures conracs when he fuures curve is in conango 1 leads o buying higher-priced fuures conracs versus he sale of he near-erm conrac, providing a negaive roll yield. B. Oher invesmen vehicles, such as exchange raded noes (ETNs), ha expose invesors o poenial counerpary risk because he noes are issued as deb insrumens, wih reurns linked o some naural resource commodiy hrough fuures or forward conracs. Because hese ETNs are deb on he balance shee of he issuing financial insiuion, he value of he ETN can be impaced by deerioraion in he credi qualiy of he sponsoring insiuion. Equiies and equiybased sraegies (invesmens in companies wih significan direc or indirec securiy ineres in he ownership and developmen of naural resource commodiies) Invesors own he companies ha own he naural resource asses. Invesors essenially reain he company o manage he naural resources for heir benefi. Invesors gain indirec physical exposure o he naural resources, while ousourcing he managemen of he resources. Invesmen vehicles exis oday ha concenrae porfolio holdings on companies wih business operaions linked o naural resources. May end o focus on cerain indusries, using marke-capializaion weighings o esablish benchmarks. The skewing ha resuls from his sraegy has inheren risks: A generic marke-weighed index of naural resource equiies would ypically resul in an index wih very significan exposures o energy and meals, reflecing heir prominence in global financial markes and he macro economy, while leaving lile exposure o agriculure, imber and waer. This lack of diversificaion may no provide for a well-balanced, long-erm exposure o all he various secors of naural resources. Dominaion by mega-cap companies. FLEXSHARES MORNINGSTAR GLOBAL UPSTREAM NATURAL RESOURCES INDEX FUND (GUNR) FlexShares Morningsar Global Upsream Naural Resources Index Fund is an ETF designed o give invesors access o global equiy securiies wih an emphasis on he upsream porion of he naural resources supply chain. I is a focused, convenien way for invesors o paricipae in he rising global demand for naural resources, seeking o capure he favorable growh and price impacs of his rend. The Fund invess in global companies focused in he energy, meals and agriculure secors, while mainaining a core exposure o equiies in imberlands and waer resources secors. By allocaing a dedicaed exposure o imber and waer resources, diversificaion wihin he naural resource space is increased. This provides invesors wih broader coverage of he upsream naural resource supply chain. The Fund s mehodology seeks o preven any one area in naural resources from dominaing or skewing overall exposures and performance. 1 Conango refers o a siuaion where he fuure spo price is below he curren price, and people are willing o pay more for a commodiy a some poin in he fuure han he acual expeced price of he commodiy. flexshares.com The Case for Global Upsream Naural Resources 3 of 5
4 INDUSTRY SECTOR ALLOCATIONS REFLECT A BALANCED, GUNR: Targe Allocaion FOCUSED APPROACH Allocaions are subjec o change. Energy (30%): Globally inegraed exploraion and producion companies wih crude oil and naural gas reserves n Energy 30% n Meals & 30% Meals & Mining (30%): Global indusrial and precious meals companies ha Mining own or have lease righs o mineral deposis n Agriculure 30% Agriculure (30%): Producers of core agriculural producs such as grains, seeds n Timber 5% and seed oils, livesock and ferilizers n Waer 5% Timber (5%): Timberland REITS and companies wih ownership or lease righs o imberlands Waer (5%): Global companies wih business operaions ha conrol, supply and rea waer resources FOR MORE INFORMATION Consul wih your financial professional concerning how FlexShares Morningsar Global Upsream Naural Resources Index Fund can help you pursue your invesmen objecives. Or conac FlexShares a FlexETF ( ). IMPORTANT INFORMATION Before invesing, carefully consider he FlexShares invesmen objecives, risks, charges and expenses. This and oher informaion is in he prospecus and a summary prospecus, copies of which may be obained by visiing Read he prospecus carefully before you inves. Foreside Fund Services, LLC, disribuor. flexshares.com The Case for Global Upsream Naural Resources 4 of 5
5 CONTACT US FINANCIAL PROFESSIONALS By Phone Consul Consulans are available Monday - Friday: 9 AM o 5 PM ET FlexETF ( ) INDIVIDUAL INVESTORS Your Financial Professional By Mail/Overnigh Delivery FlexShares ETFs c/o Foreside Fund Services, LLC 3 Canal Plaza Suie 100 Porland, ME Follow Us on LinkedIn FlexShares flexshares.com The Case for Global Upsream Naural Resources 5 of 5 Q31640 (01/17)
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