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ETF News And Commentary

While most commodities saw a weak 2011, few were as hard hit as steel during this tumultuous time frame. After hitting a 52 week high early in the year of about $900/metric ton, prices of steel slumped back towards earth by end of year costs coming in below $800/metric ton. Given that China, which is by far the world’s biggest consumer of the metal, is apparently slowing down, many are growing increasingly concerned that prices could continue to slump here in 2012. If this happens and European demand remains weak, the highly sensitive steel industry could be in for another rough year.

Despite these concerns, there are at least a few reasons to be hopeful about the future of the space in the near term. Many developed nations are desperate to reinvest in their infrastructure programs and with the U.S. potentially avoiding a recession, there could be greater demand on the home front for these new steel-heavy transit services. Additionally, several other emerging markets besides China, namely India, are continuing to demand more steel to support middle class lifestyles. In fact, India was one of the only countries on the planet that saw growth in steel production in every year from 2007 to 2010, suggesting that the country’s demand for the metal is likely to grow even in rough global economic conditions (see Top Three Emerging Market Consumer ETFs).

Thanks to these realities, it may be worth it to take a closer look at some of the big players in the beaten down steel industry for investment.  However, it should be noted that the sector remains fraught with risk and that another recession is certainly not beyond the realm of possibilities. In light of this, it may be a good idea to gain exposure to the space in basket form, specifically with ETFs. Luckily for investors seeking exposure via this route, there are two ETF options available. While they may appear similar, there are actually some key differences between the two that investors should be aware of, which we have highlighted below:

PowerShares Global Steel Portfolio

This fund tracks the NASDAQ OMX Global Steel Index which is a benchmark designed to measure the overall performance of globally traded securities of the largest and most liquid companies involved in the manufacturing and storage of iron and steel products. The Index is rebalanced quarterly using a modified, market-cap-weighted methodology. Currently, the fund holds 70 securities and charges investors 75 basis points a year in fees for its services (read Top Three Precious Metal Mining ETFs).

Top individual allocations go to Vale (VALE - Analyst Report), ArcelorMittal (MT - Analyst Report), and POSCO (PKX - Analyst Report), all of which make up at least 7.6% of the fund. In terms of country exposure, there is a good deal of variety with four nations—Japan, Brazil, U.S., and South Korea—all making up at least 10.5% of total assets. Despite the fund’s solid job of dividing up assets, PSTL has struggled in recent months, losing 38.5% in the past year. The only saving grace is now the fund has a P/E ratio below 10 and P/B ratio below 1.0, suggesting that there could be some long term value that could be unlocked in this fund if the sector picks up again soon.

Market Vectors Steel Index ETF (SLX - ETF report)

For another way to play the steel industry, many investors turn to SLX which tracks the NYSE Arca Steel Index. This benchmark is a modified market capitalization-weighted index comprised of publicly traded companies predominantly involved in the production of steel products or mining and processing of iron ore. The fund charges investors 55 basis points a year in fees but holds a much smaller basket of securities than its counterpart at just 27 companies in total (read Three Low Beta Sector ETFs).

In terms of top holdings, Rio Tinto (RIO - Analyst Report) and Vale take the two top spots, making up 10.9%, and 10.6% of the fund, respectively. Beyond these two giants, MT and PKX also take up another 6.3% each as well, while a smattering of firms that make up at least 4.7% of assets round out the top ten, giving the product a heavier focus on the top ten securities. For the country breakdown, American securities dominate the profile of the fund, taking up nearly two-fifths of total assets. Beyond this, Brazil (22.5%), Luxembourg (12.3%), and the UK (12.2%) all receive double digit allocations as well (see ETFs vs. Mutual Funds).

While SLX hasn’t beaten PSTL by much on the performance front (roughly 300 basis points over the course of the year), the fund does have a much lower expense ratio and better volume. This could mean that the fund may be a better choice for investors looking for tight bid ask spreads and lower overall costs. These cheaper costs also come in addition to comparable figures on both the P/E and P/B fronts, suggesting similar value in the underlying holdings. However, it is important to remember that the fund is far more concentrated in its top holdings and that it has less depth across the broad steel producing industry.

 

Category

PSTL

SLX

Total Holdings

70

27

% in Top Ten

50.2%

68.6%

2011 Performance

-38.5%

-35.6%

Expense Ratio

0.75%

0.55%

Volume  (Daily Average)

4,100

119,547

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