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Lopamudra Bhattacharya

Steel ETF Poised for Growth in 2017

SLX

Trades from $3

Overcoming headwinds such as cheap imports from countries like China and Korea, the lone ETF dedicated to steel stocks - VanEck Vectors Steel ETF (SLX - Free Report) looks promising as we enter 2017. Currently the demand-supply matrix for the industry is looking good. Driving factors behind the steel industry are discussed below.

Donald Trump’s win in the presidential election can be called a game changer for the industry. The President-elect has promised to introduce a burst of stimulus with tax cuts and infrastructure spending package. 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 (read: Steel ETF Looks Promising after Trump Win).

Meanwhile, demand for the metal is also expected to increase buoyed by encouraging Chinese manufacturing data and continued growth in emerging economies. 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.

Steel prices also depend on the price of key raw materials needed for steel production such as iron ore, steel scrap, and coking coal.  Prices of these raw materials went up in 2016 and are expected to strengthen further in 2017, thuspushing steel prices higher (read: Top Mining ETFs & Stocks of 2016: The Best from a Winner).

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. China, a major producer of steel, plans to cut its output further in 2017 and aims to set it below demand level. China’s steel demand-supply metrics would be an area to watch in 2017. Investors buying into this optimism should focus on the only pure play ETF targeting the steel industry (see all Materials ETFs here).

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 14.1% share followed by Vale SA with 12% share. The rest of the stocks in the portfolio have less than 7% 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.

In terms of country allocation, U.S. dominates the fund’s returns at 36.6%, followed by Brazil (21.8%) and UK (14.1%). The ETF has amassed $103.5 million in its asset base while trading in lower volume of roughly 85,000 shares a day on an average. The product charges 55 bps in fees and expenses from investors and has gained a whopping 142.7% in the past one year (read: 5 ETF Investment Ideas for 2017).

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