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Time to Invest in the Steel ETF

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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. The lone ETF dedicated to steel stocks - VanEck Vectors Steel ETF (SLX - Free Report) has gained a whopping 57.5% in the year-to-date period. In fact, the fund has attracted inflows of $37.43 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 ETFs of the Best Sectors This Year).

Reasons for the Rise

One of the primary driving forces behind the surge has been 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.

Meanwhile, Credit Suisse has raised earnings per share estimates for several steel companies including U.S. Steel Corporation and Nucor in order to reflect improved conversion costs and recent mid-quarter updates from the electric arc furnace (EAF) sector.

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.

Demand-supply matrix for the industry is also looking good. As per World Steel Association, world crude steel production fell 0.1% in the month of May compared with the prior year period.

For those buying into this optimism, investors 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 13.6% share followed by Vale SA with 10.8% share. The rest of the stocks in the portfolio have less than 7% weight individually. The product has diverse exposure across market spectrums with 33% in small caps, 26% in large caps and the rest in mid caps (see all Materials ETFs here).

In terms of country allocation, U.S. dominates the fund’s returns at 38%, followed by Brazil (20.4%) and United Kingdom (13.6%). The ETF has amassed $78.3 million in its asset base while trading in lower volume of roughly 68,000 shares a day on average. The product charges 55 bps in fees and expenses from investors and has gained 11.8% in the last one week (as of June 12, 2016) (read: Best New ETFs for Your Portfolio).

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