Resources revolution

The Australian share market has had a stellar March, returning in excess of 5%. Calendar year to date, the S&P/ASX 200 Accumulation Index is one of the only developed equity markets to experience a positive return (in Australian dollar terms), and has returned 2.44% for the first quarter of 2022, keeping its head above water due to rising commodity prices.

The sharp rebound in raw materials prices, sparked inflationary pressures and the Ukraine/Russia conflict has provided a solid floor for global resources and commodities to rally.

The inflationary environment is suited to commodities. The latest annual December CPI reading of 3.5% in Australia was near a 12-year high and this is positive for resources and energy sectors. Commodities have historically outperformed in periods where there was unanticipated inflation. This outperformance, historically, has also been particularly notable in corresponding periods of positive economic growth.

The challenge of picking resources stocks

There is no doubt the share prices of Australia’s commodity producers are volatile. Since the beginning of the year, for example, Chalice Mining is down 26.56%, Whitehaven Coal, meanwhile, has risen 74.41%. Disparity of returns exists among resource companies that have similar portfolios, Mineral Resources, which has a sizable iron ore business has fallen 12.12%, while Champion Iron is up 38.45%.

Stock picking is challenging. This is where diversification has its payoff. Since the beginning of 2022, the VanEck Australian Resources ETF (MVR) has returned 16.03%. Some of its stocks have performed poorly but the broad portfolio has easily outperformed the overall share market.

Note: As always, past performance is not a reliable indicator of future performance. 

Diversification is key

Compared to other resources ETFs, diversification in MVR is unique because the index it tracks caps individual stocks, reducing the dominance of the mega/large-cap stocks and increasing exposure to mid-caps. In contrast, the market capitalisation Australian resources index, the S&P/ASX 200 Resources Index, is dominated by one mega cap, BHP, which accounts for over 43% of the index, a figure which has ballooned this year after the unification of the BHP London listing into its ASX listing exacerbating concentration risk.

What this means is that one stock, BHP, has the potential to drive the performance of the whole resources sector; it is also a company many investors already own. MVR is currently underweight the diversified metals and mining sectors compared to the S&P/ASX 200 Resources Index. Conversely, it is overweight the oil subsectors, gold, coal, copper and aluminium.

MVR is currently underweight the diversified metals and mining sectors compared to the S&P/ASX 200 Resources Index. Conversely, it is overweight the oil subsectors, gold, coal, copper and aluminium.