The iShares Core S&P/ASX 200 ETF (ASX: IOZ) and ASX mining share BHP Group Ltd (ASX: BHP) are both popular investments.
The BHP share price has dropped close to 20% this year, as the chart below shows. The mining giant's valuation decline this year may make it more attractive to investors. On the other hand, the IOZ ETF has climbed 1.6% in 2024 to date, despite the 4% sell-off since 1 August 2024.
After such a divergence of performance, one investment may make more sense than the other.
I believe there is one key factor that can help me decide. But first, I'm going to consider the importance of the iron ore price for BHP.
Commodity prices
I often like to say that ASX iron ore shares act with volatility because of how wildly the iron ore price can move over the weeks and months.
According to Trading Economics, the iron ore price has dropped from above US$140 per tonne to close to US$100 per tonne today since the start of 2024.
When an iron ore price goes up, the extra revenue can largely add straight onto net profit because mining costs don't change month to month. However, the opposite is true when iron ore prices fall – the revenue fall largely comes straight off net profit, too.
With BHP's heavy exposure to the iron ore price, its share price success for the foreseeable future is dependent on how much iron ore China is buying. That's not helpful for earnings diversification, but there is a possibility of a recovery from here.
Diversification
I do like that BHP is working on growing its exposure to different decarbonisation commodities including copper and potash. It's not like it's a pure iron ore miner.
However, it is just one company, whereas the IOZ ETF is invested in a portfolio that tracks the ASX 200, which is made up of 200 of the largest businesses on the ASX.
Around 9% of the portfolio is invested in BHP shares, and it also gives sizeable exposure to Commonwealth Bank of Australia (ASX: CBA), CSL Ltd (ASX: CSL), National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC), ANZ Group Holdings Ltd (ASX: ANZ), Wesfarmers Ltd (ASX: WES), Macquarie Group Ltd (ASX: MQG), Goodman Group (ASX: GMG) and Woodside Energy Group Ltd (ASX: WDS).
For me, this is the key point of difference.
If I were only going to have one investment in my portfolio, I think it would be safer and more likely to lead to success to own a group of 200 businesses than just one.
If newer businesses grow large enough, they can take the place of some of the other, more traditional businesses. For example, biotech giant CSL and industrial property business Goodman have both grown over the last decade to become two of the biggest businesses on the ASX. The IOZ ETF portfolio can evolve over time.
In my opinion, the IOZ ETF is a better long-term choice than BHP shares. The fund can also provide solid, diversified passive income. Excluding franking credits, the IOZ ETF currently has a dividend yield of 3.7%.
