A reader wants to know: The resources and commodities sector is doing well but should he buy stocks or an ETF?

Q – I try to spread my individual security choices across the main sectors. One challenge I have always faced is choosing companies within the resources and commodities sector.

I’m a relatively new investor. I currently only hold one security in that sector and that’s Suncor. I chose it because of the high volatility of the sector and the strong market capitalization of the company.

However, this sector includes more than just oil. I have chosen no companies in the precious metal sector or any other commodity. This is simply because I don’t know how to select them, and I worry about their volatility.

My question is this: should I invest in an ETF or a small basket of ETFs that helps allocate my funds appropriately within the sector or should I choose individual companies? If I am choosing individual companies, which groups within the sector do I choose? One oil and gas, one gold, one copper, one lithium, for example. I wouldn’t know where to begin.

If the former is the way to go for me, do you recommend any ETFs or mutual funds that satisfy my goals? – Lance R.

A – We have several stocks on my newsletter recommended lists that would provide exposure to a range of resource sectors. For precious metals, I like Franco-Nevada (TSX, NYSE: FNV), which has performed very well. For copper, look at Lundin Mining (TSX: LUN). Teck Resources (TSX: TCK.B, NYSE: TCK) is Canada’s largest diversified resource company, with mining operations focused on copper, steelmaking coal, and zinc. As well, it has energy interests in the Foot Hills Oil Sands project, which is scheduled to come into production next year.

If you prefer an ETF, the iShares S&P/TSX Capped Materials Index ETF (TSX: XMA) provides exposure to all types of resource stocks except oil. Top holdings include Barrick Gold, Potash Corp., Agrium, and Franco-Nevada.

There are many natural resource mutual funds that include energy stocks in their portfolios along with mining and other resource companies. However, most have unimpressive track records – some have lost more than 20 per cent annually over the past three years.

One that’s worth a look is Scotia Resource, which has a three-year average annual return of 6.1 per cent and generally outperforms the category average. Some of the top positions are in NexGen Energy, Glencore International, and Suncor Energy. – G.P.

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