Yahoo Finance Steel ETF Looks Promising after Trump Win
The price of steel has been on the rise in 2016 after it fell to multi-year lows in 2015 owing to cheap imports from countries like China and Korea. Its northward journey paced up in the past one-month period. The lone ETF dedicated to steel stocks - VanEck Vectors Steel ETF SLX has surged 22.2% outperforming the SPDR S&P 500 ETF SPY, which gained 5.3% in the last 30 days (as of December 2, 2016). In fact, the fund has attracted inflows of $7.32 million during this period as per ETF.com.
So let’s examine in detail the factors that are driving the steel fund and whether the rally is likely to continue (read: Top and Flop ETFs of November).
Reasons for the Rise
One of the primary driving forces behind the surge has been Donald Trump’s win. Among the many things, the President-elect has promised to introduce a burst of stimulus with tax cuts and infrastructure spending package. Speculation is rife that investments will a get a new lifeline now.
During his campaign, Trump promised to double infrastructure spending compared with competitor Hillary Clinton, who had proposed spending of around $275 billion. Trump plans to spend $550 billion over the next decade to fix and upgrade the nation’s crumbling roads, bridges and waterways. This would involve lot of construction work and has the potential to boost the demand for steel significantly.
As per the World Steel Association, global demand for steel is expected to increase 0.2% this year and 0.5% in the next after a 3% decline last year. This is especially true as a better outlook for China and continued growth in emerging economies will help the global steel industry to return to the positive growth path in 2016 and sustain the uptrend thereafter (read: Time to Invest in the Steel ETF).
Meanwhile, another tailwind for the industry is the implementation of tariffs on steel imports in the U.S. in order to protect domestic companies from the negative impact of Chinese competitors flooding the market with cheap supply. Apart from that, steel buyers including service centers reduced their inventory levels last year and now have limited avenues to procure steel other than buying steel from domestic steel mills. Additionally, producers of the metal have maintained a supply discipline that led to higher lead times, which are currently supporting spot steel prices (read: Steel ETFs in Focus as Miners Slash Iron Ore Forecast).
Thus, currently demand-supply matrix for the industry is looking good. Investors buying into this optimism should focus on the only pure play ETF targeting the steel industry.
Focus on SLX
The fund provides exposure to companies involved in the steel sector by tracking the NYSE Arca Steel Index. It holds 27 securities in its basket. Out of these, Rio Tinto takes the top spot with 13.3% share followed by Vale SA with 12.6% share. The rest of the stocks in the portfolio have less than 7.2% weight individually. The product has a definite tilt toward large caps with 50% exposure in the same and the rest in small-caps and mid-caps (see all Materials ETFs here).
In terms of country allocation, U.S. dominates the fund’s returns at 34.7%, followed by Brazil (22.9 %) and United Kingdom (13.3%). The ETF has amassed $102.5 million in its asset base while trading in lower volume of roughly 70,000 shares a day on an average. The product charges 55 bps in fees and expenses from investors and has gained a whopping 106.1% in the year-to-date period. SPY gained 9.4% during this period (read: Sector ETFs Hitting 52-Week High on Trump's Victory).
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