Fund in Focus – BetaShares S&P/ASX 200 Resources Sector ETF (ASX: QRE)

BY Louis Crous | 6 June 2017

The BetaShares S&P/ASX 200 Resources Sector ETF (“QRE”) was the very first ETF launched by BetaShares in December 2010 (we’ve now launched 40!). It consists of the largest Australian resources stocks by market capitalisation that is part of Australia’s benchmark S&P/ASX 200 Index. Whilst the resources sector is a major component of the Australian economy, its overall contribution can vary significantly depending on global commodity prices. As an example, the following table shows both the number of resources companies contained in the S&P/ASX 200 Index over time as well as the resources sector’s weighting within the overall index at various dates.

The table shows the sector representation prior to the Global Financial Crisis (2007), the peak of the latest commodities cycle (2012), the sector low in 2016 and lastly at a more recent date. As one can see the current weighting to resources is very different to that seen only 5 years ago in 2012. Over this period, commodity prices declined significantly, many mining companies slashed their dividends and exploration budgets, and raised capital to address their debt levels. Both earnings and the investment return outcomes of this sector can be volatile and at times very different to the other sectors comprised in the S&P/ASX 200 Index. As an example, the chart below shows the relative performance of the Resources Sector relative to the broad market year by year. Many investors are attracted to this divergence in returns and express their views on the commodity cycle via the most relevant stocks.

S&P/ASX 200

Source: Bloomberg. The table above shows the performance of the S&P/ASX 200 Resources Index, the Index which QRE aims to track, not the performance of the ETF. It does not take into account QRE’s management costs. You cannot invest directly in an index. Past performance is not an indicator of future performance.

Investment rationale for QRE

  1. A resources sector tilt: Sector ETFs such as QRE offer a convenient way to take an investment view on a particular sector. Just as an investor’s asset allocation decision predominantly explains his or her overall portfolio return over time, so too do sector allocations explain a great amount of an investor’s return in an equity portfolio. Many investors, whether intentionally or not, would express their view on the sector (or commodity prices) by trading a number of stocks. By rather using an ETF such as QRE, this exposure can be accessed more conveniently and via a single trade on the ASX, without having to first determine which stocks to trade. In 2016 many investors got caught out by the sharp correction in commodity prices and the associated rise in resources stocks. Many investors had underweight exposures to this sector at that time and could conveniently have corrected for this by using an ETF such as QRE.
  1. Diversification: Using QRE an investor is able to instantly gain access to a diversified basket of Australian resources stocks. Some investors may believe that given the weights that BHP Billiton (“BHP”), Rio Tinto (“RIO”) and Woodside Petroleum (“WPL”) command in QRE one may as well just buy those stocks. While it is true that these 3 stocks have a high weighting (52% as at 31 March 2017), it is also important to realise that by rather holding QRE the investor achieves instant diversification to other stocks and their associated commodities in the remaining 48%. In fact, for Q1 2017, BHP’s share performance has been negative (-1.94%) compared to that of QRE with a positive performance of 2.14%. The table below shows the various Sub-Industry exposures available through QRE.

Sub industry

In summary, sector ETFs are becoming increasingly popular for accessing particular exposures or tilting portfolios in a simple and cost-effective way. For more on this product see here.

Visit our website for information on our other Australian and global sector ETFs.

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