Stocks versus ETFs in the mining sector: How can you solve the stock picking problems discussed yesterday?

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Stocks versus ETFs in the mining sector: How can you solve the stock picking problems discussed yesterday?

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Published Date: 2021-02-25 | Source: INCE|Connect | Author: Gary Booysen | Rand Swiss | Director and Portfolio Manager

Stocks versus ETFs in the mining sector: How can you solve the stock picking problems discussed yesterday?


You can see the market is accurately pricing these companies anyway. When they're doing well the market capitalization goes higher, when they do badly the market capitalization falls. If only there was a way to automatically buy companies that are getting bigger and sell companies that are falling all within a tax-efficient wrapper...

Enter "indexation" and passive Exchange Traded Funds (ETFs). These products do exactly what you want: They buy big companies that are entering the specific broad-based index you're looking at and sell the companies that are moving out of the index.

Now you can just pick a theme, like mining, and buy an ETF to track the whole basket of companies. Full management diversification, automatic buying and selling, and since the taxman sees the product as a single unit you avoid ad hoc tax events that come with buying and selling in your personal name. Great!

It all sounds too good to be true. Well yes, that's because it is...


For every one of the benefits mentioned above, your costs have crept incrementally higher. To incorporate the private company, you need to pay accountants, which were not just focused on the mining per se. Your profit per ounce dropped even as your volume of ounces increased. Then you listed and had to pay exchange fees and the added compliance burden of being a listed company. The net value accruing from your underlying assets became a little smaller.

And finally, you bought the ETF, which while very cheap in terms of an annual management fee, does shave a little more off your ultimate return. You also gave up the flexibility of selling the companies you wanted to sell and left it to a simple algorithm. An algorithm that is mechanistic and will not make rational (or thankfully irrational) human judgements. It just buys companies getting bigger and sells the ones getting smaller. No matter what that means for the overall market.

So, what should you do as an investor, buy the ETF or the stock?


The answer really depends on you.

The ETF gives you a wonderful broad way to capture thematic exposures across multiple management teams, but it costs your flexibility and money. Not as much money as an active fund, but in many cases very close. Historically active management fees where high and passive fees were low. Today, many specialist passive exchange traded funds have management fees well above traditional active managers.

On the other hand, direct stock investment comes with its own challenges. You need to have some understanding of what you're doing. You need to know something about the kind of company you're buying. Who is your management team, what do the assets they manage look like?

"The rule of thumb is: The closer you get to the underlying asset the more expertise is required to effectively extract the optimal value."


So, while you may look at Anglo American (AGL), BHP Group (BHP) or Glencore (GLN) as direct diversified investments you could also look at something like the Satrix RESI (STXRES) which will capture the entire resource basket.

Of course, the saying goes: Concentrate to create, diversify to protect.


So, if you're looking for superior returns, a savvy investment directly into a single commodity stock at the right time will likely generate the highest return. Let's say we stuck with our budding young gold mining stock and took the massive run up. The share price moved from junior mining territory of R1 all the way to a spectacular R250 per share. Your investment increases exponentially creating a 24,900% return on your initial capital.

Having made so much cash you decide you'd actually just like to own the gold directly. You're tired of the risks that come with mining and would prefer your wealth to be directly exposed to the commodity price.

You have two options.


You can either go onscreen with a JSE account and buy up some physical Krugerrands, the final product of all those miners' economic efforts, or you could buy a different type of ETF: A single commodity ETF like Absa NewGold (GLD).

This ETF, while not delivering you the fun of creating a Scrooge McDuck money bin filled with Krugerands, does allow you to hold your gold digitally. For every ounce you buy of Absa NewGold ETF, they're backing it with physical gold at the Rand Refinery.

So yes, you have less flexibility to swim in your gold-filled money bin, but you do have the added safety that nobody will be breaking in and steal it, Absa will guarantee your gold after all... but as with every structure... for a fee.

Gary Booysen is a portfolio manager at multi-award-winning investment firm Rand Swiss. The firm has recently been rated the top overall stockbroker in South Africa, the top advice broker, the top online broker. They've also picked up awards for the best Tax-Free Savings Account as well as the coveted People's Choice award. If you're interested in building up your investment portfolio Ince has arranged a special package for you with the company. To find out more click here.

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