Commodities are an important part of any portfolio, as they can offer diversification, inflation protection, and exposure to global growth trends. However, not all commodities are the same, and different types of commodities may have different risks and returns amd as such it is important to diversify your commodity exposure.
For local investors, the most common way to invest in commodities is through the Top40 ETF or the RESI10 ETF (JSE code: STXRES), which track the performance of the largest and most liquid companies in the South African market. However, these ETFs are heavily skewed towards gold and platinum group metals (PGMs), which account for more than half of the RESI10 ETF and a significant portion of Anglo American (JSE code: AGL), one of the top holdings in the Top40 ETF.
While gold and PGMs have their merits, they may not capture the full potential of the commodity sector, especially in terms of diversification and growth opportunities. That’s why we like the iShares MSCI Global Metals & Mining Producers ETF ETF (NYSE code: PICK).
This ETF covers global companies that are primarily engaged in mining, extraction or production of diversified metals, such as aluminum, steel and copper.
There is also a chunky dividend yield of almost 7% in US$ albeit this will be volatile.
The PICK ETF offers several advantages over the RESI10 ETF:
- It has a more balanced exposure to different types of metals, with less than 2% allocated to precious metals and more than 98% allocated to industrial metals.
- It earns directly in USD, which can hedge against currency fluctuations and benefit from a weaker rand.
- It has a more global exposure, with only 2% allocated to South Africa and more than 97% allocated to other countries, such as Australia, UK and USA. This can reduce the country-specific risk and capture the growth potential of emerging and developed markets.
- It has a lower concentration risk, with 265 stocks in total and the top holding being BHP Group at around 14.7%. This can reduce the impact of any single company on the overall performance of the ETF.
We think that the PICK ETF is a great way to diversify your commodity exposure and gain access to a broader range of metals that are essential for the global economy. We are not against gold and PGMs, but we think that adding some PICK ETF to your portfolio can enhance your returns and reduce your risk.
Of course, investing in commodities is not without challenges, as commodity prices can be volatile and influenced by many factors, such as supply and demand dynamics, geopolitical events, environmental regulations, and technological innovations. Therefore, we recommend that you do your own research and understand the risks involved before investing in any commodity ETF.
|ETF name||iShares MSCI Global Metals & Mining Producers ETF|
|Issue date||31 January 2012|
|Total investment cost||0.39%|
|ETF Benchmark||MSCI ACWI Select Metals & Mining Producers Ex Gold & Silver Investable Market Index|
|Tax-free savings account||NO|
|ETF major holdings||BHP Group 16.7%, Rio Tinto 6.9%, Glencore 5.8%, Freeport 5.2% and Vale 4.5%.|
|Performance 1 year (annualised)||-10.6%|
|Performance 3 years (annualised)||+37.3%|
|Performance 5 years (annualised)||+10.6%|
|Performance 10 years (annualised)||+5.5%|
At Just One Lap, we are big fans of passive investment using ETFs. In this weekly blog, we discuss ETFs on the local market and the factors you need to consider when choosing an ETF. If you have wondered how one ETF differs from another, this is where you can find out. We explain which index each ETF tracks, what type of portfolio could benefit from holding each ETF, and how the costs will affect your bottom line.