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Steel ETF Declines as Tax Ruling Disappoints

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The U.S. Commerce Department increased anti-dumping duties on oil and gas drilling pipes from South Korea on April 11, 2017. Duties were increased to a range of 2.76% to 24.9% from 4% to 6.5%.


According to the Commerce Department, dumping occurs when a company sells its goods at less than their fair value. It seeks to apply new legal tools to determine the price discrepancies and discover any unfair trade practices deployed by foreign nations to dump cheaper than fair value goods in the U.S. If any nation is able to produce these goods at a cheaper price than American companies, they export it to the U.S., therefore making it difficult for the domestic companies to compete (read: Here's Who Trump's New Product Dumping Policy Might Help and Hurt).


In the July 2014-August 2015 timeframe, an estimated amount of $1.1 billion in oil country tubular goods were imported from South Korea. This ruling seeks to protect the American steel industry from unfair subsidized imports into the United States.


The U.S. trade deficit with South Korea reached a record $27.6 billion in 2016, a 60% increase over the last five years. The increase in duties was not deemed sufficient by the markets, as steel manufacturers had expected duties of 30%-40%. This made them question the White House’s protectionist stance.


As a result, steel stocks dropped sharply in the April 12, 2017 trading session. Let us now discuss about the steel ETF, SLX (see all Materials ETFs here).


VanEck Vectors Steel ETF (SLX - Free Report)


This fund offers exposure to companies involved in steel production and seeks to replicate the NYSE Arca Steel Index.


SLX has AUM of $169.6 million and charges 55 basis points in fees per year. From an individual holding perspective, Rio Tinto Plc, Ternium Sa, and Vedanta Ltd are the top three holdings of this fund, with 11.14%, 8.17%, and 7.79% allocation, respectively (as of April 12, 2017). From a geographical perspective, the fund has significant holdings in the United States, Brazil, and Netherlands, with 38.77%, 16.06%, and 14.25% allocation, respectively (as of March 31, 2017). The fund has returned 33.74% in the past one year and 0.69% in the year-to-date time frame. However, after the ruling, SLX fell 4.73% on April 12, 2017 to close at $38.05, as investors had expected a higher increase in import duties.


Let us now compare the performance of SLX to a broader material based ETF, XLB.


Materials Select Sector SPDR Fund (XLB - Free Report)


This fund is appropriate for investors looking to gain indirect exposure to commodity prices by investing in companies involved in extraction or production of natural resources.


XLB has AUM of $3.73 billion and charges 15 basis points in fees per year. From an individual holding perspective, Dow Chemical (DOW - Free Report) , E. I. du Pont de Nemours (DD - Free Report) , and Monsanto are the top three holdings of this fund, with 12.14%, 11.91%, and 8.96% allocation, respectively (as of April 12, 2017). The fund has returned 13.07% in the past one year and 4.25% in the year-to-date time frame. XLB currently has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.


Source: Yahoo Finance


To Conclude


Though the performance of SLX has been impressive in the past one year, it is evident from the chart that in the year-to-date time frame, XLB has outperformed SLX.  This was largely due to the fall of SLX in yesterday’s trading session. President Trump’s proposed infrastructure policies have been a major driver of the steel industry. However, a weaker-than-expected protectionist policy implementation resulted in the declines in the steel fund.


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