How do investors decide which ASX 200 mining shares to buy?

Two mining workers in orange high vis vests walk and talk at a mining siteTwo mining workers in orange high vis vests walk and talk at a mining site

The commodity trade of 2022 is continuing to go strong with companies all along the chain, from mine to metal, still catching a strong bid.

Businesses involved with energy-based commodities have been standouts, with the prices for various raw materials underpinning their operations soaring to record highs this year. And the pace of upside isn’t slowing.

As well, there are new entrants into the arena, bringing with them an entirely new subsector– electric vehicles, and renewable energy.

But who can forget the old rams in the back paddock either, the likes of iron ore, crude oil and gold?

The new age of ASX 200 mining shares

It all sounds really exciting within the mining domain right now. Buzz words like green energy, electric mobility, ‘sanctions’ and the likes are filling the airwaves on a daily basis.

In fact, it can all get a bit overwhelming.

Investing in mining stocks used to be somewhat of a concrete formula, with selective opportunities from diversified mining giants producing the world’s iron ore, all the way down to speculative wildcat’s exploring for gold, for instance.

Like just about all sectors however, we’ve got to adapt with the times. And with that, I’ve covered several ways in which investors can gain exposure to ASX 200 mining shares, backed by the analytical rigour of some of our finest mining analysts here in Australia. Read on.

Where to choose, who to pick?

Gone are the days when individual stock picking was the aim of the day. We know far too much about the benefits of diversification to portfolios.

Plus, we also live in the information age, where content is freely available at the click of a button. Finally, as we’ve seen this year, commodities and mining stocks both like trend following, and move in cycles.

It is for these reasons that investors should think in terms of a particular trend or ‘theme’ that is driving share price returns.

This opens up the floodgates of opportunity for investors by allowing a more pragmatic, diversified approach to investing, versus concentrating positions into 1 or 2 speculative bets.

As we’ve seen to date, various investment themes arise in mining based on demand/supply and prices of commodities in the market. Lithium is case in point here.

Meanwhile, diversification is important not just from a risk management perspective. It provides investors multiple sources of return as well.

Consequently, portfolio managers at Jevons Global recommend to form a “core basket”, or selection of shares, when trying to allocate capital to the mining space.

This includes those investors buying mining stocks for their chunky dividends this year.

Diversified exposure to investment ‘themes’

Using the electric vehicle (EV) theme as an example, it’s clear there are multiple entry points for investors to consider.

We have EV stocks, battery technology companies, and also the miners extracting lithium in its raw forms for example.

On first glance, one might automatically turn to lithium shares to play the EV mining space, seeing as it tends to command most of our attention.

Let’s think a little more laterally, however.

Investors can gain equally as exciting exposure to the space via ASX 200 miners and producers of rare earths, Jevons Global says.

That’s because these metals are critical in the development of EVs.

This is smart and logical investing, positioning at an integral point along the electric vehicle supply chain – versus just the main ‘ingredient’ itself [lithium].

Keeping this in mind, there’s any number of ‘themes’ that Aussie savers can lean towards.

For instance, those bullish on steelmaking, or economic growth in emerging markets such as India and Brazil (where steel consumption has risen markedly in recent years) might also consider going long nickel and iron ore companies – the two mined ingredients to make steel.

And with further support from mining analysts at JP Morgan in its 2022 Energy paper, the central point remains – investing in a basket of companies, rather than picking a single name.

Moreover, this can be easily achieved through the use of thematic ETFs, that do the heavy lifting for us as investors. With ETFs, investors can hold a diversified portfolio of companies with just 1 single instrument.

The Betashares Global Energy Companies ETF – Currency Hedged (ASX: FUEL) and Global X Battery Tech & Lithium ETF (ASX: ACDC) are 2 examples that do just this.

Bringing it together

Whilst we can go on all day on various ways to identify and invest in ASX 200 mining shares, the main points raised here are key.

Identifying investment themes (versus individual companies), selecting a basket of shares (versus just 1 or 2 stocks for diversification), and understanding the benefits of investment vehicles like ETFs are paramount.

All-in-all, the same rules and mantras regarding risk and money management still apply.

The post How do investors decide which ASX 200 mining shares to buy? appeared first on The Motley Fool Australia.

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Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended BetaShares Global Energy Companies ETF – Currency Hedged. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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