First Trust Global Resource Solution Fund too amorphous to add to portfolio, adviser says

By Aleesia Forni

Columbus, Ohio, Nov. 17 - The First Trust Global Resource Solution Fund's ability to profit from macro-economic trends like population growth, natural resource depletion and technology advances is a "big maybe," according to Russell Wild, a fee-only financial planner in Allentown, Pa. and author of Exchange-Traded Funds for Dummies.

Wild said the fund's focus is "kind of amorphous."

First Trust registered the planned new closed-end fund in an N-2 filing with the Securities and Exchange Commission on Monday.

The fund will invest in a diversified portfolio of non-U.S. and U.S. equity securities of companies active in the global environmental markets, with a concentration on the securities of companies that the fund's sub-advisor believes will benefit from increased corporate, private and government spending in six areas: water and waste water; agribusiness; renewable energy and energy efficiency; infrastructure; new materials and recycling; and environmental technologies.

The filing stated that the First Trust fund will employ a limited, tactical covered call option strategy seeking to enhance its risk-adjusted total returns over time and also to generate option premiums to more efficiently implement the fund's distribution policy.

With regard to population growth, Wild said, "we've got a pretty good idea of where that's going, but how is that going to affect the market?"

Wild added that natural resource depletion and technology advances bring up "lots and lots of maybes" and "lots of unknowns" for this fund.

The fund will also invest in the securities of companies with a focus on the effects of climate change.

"If ever there was a big unknown, it is climate change," Wild said. "Never mind how [climate change] is going to affect the market."

Wild said that even if these trends were predictable, "it's not to say that that is going to result in a boost to the bottom line in these companies."

"My guess is most people who are buying this are thinking they're going to hold it for a year or two, and they're going to do better than the broad market because, well, everybody's talking about the environment and global change and natural resource depletion and therefore this is probably a hot field to be in," Wild said.

"And people who buy what's hot constantly shoot themselves in the foot," Wild said. "Thanks to all these new ETFs, that has become easier than ever.

"Just because a certain sector is becoming more prominent in our economy does not mean that sector is going to be profitable," Wild said. "There are lots of things involved in profitability."

Looking at all of these "maybes," Wild said he is not "champing at the bit to buy this fund" for his portfolio.

Wild compared this fund's objective to the dot-com bubble and burst of the early 2000s.

"Since that time, things on this planet have changed as much as how well connected we are, and yet internet stocks certainly have not cleaned the clock on other kinds of stocks over the last decade," Wild said.

"As far as environmental technology, I'm old enough to remember the 1980s and the first Earth Day," Wild said. "Everybody was excited then about the rise in consciousness about the environment and everyone thought environmental stocks were going to go through the roof, and it never happened."

"Quite the contrary," Wild said. "They lagged."

Wild said there has been a surge in the number of ETFs over the last six years, and of all the new entries into the market, very few are tracking broad indexes.

"They're all trying to out-niche each other," Wild said.

He continued that most of these funds are "hitting the market at the wrong time."

"They're investing in whatever is hot, and as we know from decades and decades of research, if you're going to invest in anything, you don't want to invest in what happens to be hot at the moment," Wild said, "because chances are good you're getting on board too late."

Wild continued that like this fund, most are focused on "what's in the news."

"They're picking what they think people are going to buy," Wild said, "and people will."

Wild compared the new fund's focus on the environment to the "worst example" of niche marketing he could think of: HealthShares Cancer ETF.

"Allegedly, this [ETF] was going to take off if we found the cure to cancer," Wild said. "And those were just downright silly.

"Even if we do find the cure for cancer, it means that one company's top stock is going to shoot through the roof, and all of the other companies [that are] part of this ETF, they're all going to fall.

"So even if we did find the cure for cancer, it wouldn't necessarily mean that your investment in this cancer ETF is going to go anywhere."

Wild said these niche ETFs "sound good on paper, but what sounds good on paper [is] often not good in the real world."

Still, Wild believes that certain sectors, the classic example being REITs, may be worth overweighting a portfolio "if they have limited correlation for the rest of the market."

"But this [First Trust Global Resource Solution Fund] seems to be a hodgepodge of sectors," Wild said.

"On first blush, I don't really see this fitting in the same category as say a REIT fund, which makes sense in a portfolio if you believe that REITs in the future will have the kind of lack of correlation that they've had in the past of the broad market."

While Wild is uncertain of the cost of this new fund from Wheaton, Ill.-based First Trust, he typically invests in funds that cost "less than 20 basis points" and believes this fund is "going to be at least double that."

"Maybe triple, maybe more," he added.

"There's nothing that's popping out at me that says this is going to be a good diversifier to an average investor's portfolio."

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