Yahoo Finance Steel ETFs in Focus as Miners Slash Iron Ore Forecast
Two of the world’s largest iron ore producers – Vale SA VALE and Rio Tinto plc RIO – slashed their iron ore outlook.
The Anglo Australian miner Rio Tinto tweaked its expectation for shipments to 325–330 million tons for 2016 from 330 million tons while maintaining the iron ore shipment forecast of 330–340 million tons for 2017. On the other hand, Brazilian miner Vale expects to produce 360–380 million tons of iron ore next year, down from the previous forecast of 380–400 million tons (see: all the Materials ETFs here).
Production of iron ore rose 2% at Rio Tinto while shipments fell 5% in the third quarter due to port and rail maintenance. For Vale, production increased 1.5% due to improved performance at mines in the northern Amazonian state of Para.
The move has raised hopes on the iron ore commodity market, as declining output will ease the global supply glut of the steelmaking material. Notably, the price of iron ore has been rising this year on higher demand following credit easing in China, the world's largest importer of iron ore. Notably, China imported 9.3% higher iron ore in the first eight months of 2016 than the year-ago period. The trend of solid Chinese demand coupled with crimping supply will likely continue and could push iron ore prices up in the near term.
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).
With industry fundamentals on the mend, investors should focus on the only pure play – VanEck Vectors Steel ETF SLX. Further, Rio Tinto has a Zacks Rank #1 (Strong Buy) and a solid Zacks Industry Rank in the top 17% with a VGM Style Score of B. Vale too has a favorable Zacks Rank #2 (Buy) and a solid Zacks Industry Rank in the top 7% with a VGM Style Score of B, suggesting continued outperformance in the months ahead.
SLX in Focus
The fund tracks the NYSE Arca Steel Index and provides exposure to a small basket of 27 stocks. Rio Tinto and Vale occupy the top two positions in its basket with 13.7% and 10.7% share, respectively. This suggests that company specific risk is high and that these firms dominate the returns of the fund. The product has almost equal exposure across all the three market spectrums.
American firms dominate the fund’s returns at 38%, followed by Brazil (19.7%), United Kingdom (13.7%) and the Netherlands (10.7%). The ETF has amassed $82.8 million in its asset base while trades in lower volumes of about 55,000 shares a day on average. It charges 55 bps in fees from investors (read: Commodities Enter Bull Market: 6 ETF Winners).
In terms of performance, the fund has delivered whopping returns of 66.6% in the year-to-date timeframe compared with gains of 9.9% for the broad sector fund XLB and 6.5% for the broad market fund SPY.
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SPDR-SP 500 TR (SPY): ETF Research Reports
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