Betting on a Resource Turnaround

05/09/2013 7:00 am EST


This fund has felt the brunt of a resource decline, but it’s a good bet for investors who are looking more long-term, says the staff of the Canadian Mutual Fund Adviser.

With $12 billion of assets, iShares S&P/TSX Index Fund (Toronto: XIU) is Canada’s largest ETF. XIU has about 36% of its portfolio invested in financial stocks. This has not necessarily been a bad thing for the ETF this year, as financials have outperformed the broader market.

To be sure, the financials sub-index on the TSX has risen by less than 1% year-to-date. But the S&P/TSX Composite and S&P/TSX 60 Indexes have declined by nearly 4% over the same period.

Where the S&P/TSX 60 Index has experienced damage is in the energy and materials sectors. In the energy sector, which makes up about 24% of the Index’s weighting, shares are down nearly 7% year-to-date.

But the real damage has occurred in the materials sector. Stocks in this sector are down nearly 30% year-to-date, with gold stocks leading the way. Indeed, the S&P/TSX Global Gold Index is down a whopping 39%.

Given these declines, it’s no surprise that materials stocks now make up a smaller percentage of the S&P/TSX 60 than they did in the past. Last year around this time, the materials sector made up about 20% of the index. Now it represents a much smaller, though still significant, 14%.

Together, however, the energy and materials sectors still make up a formidable portion of the Index—38%, which is down from about 44% this time last year. So the performance of iShares S&P/TSX 60 Index will still be significantly influenced by developments in the resource sectors.

As far as the near term is concerned, that may not be such a good thing. Slower-than-expected economic growth in resource-hungry China will likely weigh on commodity-related stocks for a while. Then too, factors influencing the price of gold should also continue to have a significant impact on the index.

Investors who are willing to look beyond the near term, however, may be well rewarded over time, assuming that global economic growth—and growth in emerging markets in particular—eventually picks up. And the reward for patience may be particularly compelling if you take the view that the sell-off in resource stocks has been overdone and has created value opportunities.

But as we’ve said in the past, an investment in iShares S&P/TSX 60 Index should be made in the context of a more diversified portfolio. Such a portfolio may include both managed and passive funds, but it should certainly be diversified by geography and industry sector.

iShares S&P/TSX 60 Index Fund is a buy for patient investors who want to invest in a low-cost ETF, but who are also willing to wait for an eventual turnaround in the resource sector.

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