Along with most commodities, steel stocks have been hot in recent months. Therefore, today, we will discuss an exchange-traded fund (ETF) that could be appropriate for investors who want to invest in steel.
According to the World Steel Association:
"Steel is the world's most important engineering and construction material. It is used in every aspect of our lives... Iron is made by removing oxygen and other impurities from iron ore. When iron is combined with carbon, recycled steel and small amounts of other elements it becomes steel.”
Steel is not a metal, but rather is an alloy of iron. Due to its properties, steel is widely used in engineering and construction.
Most of the iron ore extracted worldwide is used to make steel. Therefore, potential investors would need to keep an eye on iron ore prices as well. Over the past year, the Dow Jones Iron & Steel index has returned 150%.
Recent metrics show that in 2020 global crude steel production exceeded 1.86 billion metric tonnes. China is the “largest steel producer worldwide with a crude steel production volume of nearly 996 million metric tonnes in 2019.”
The country now produces more than half of the global crude steel. India, Japan, South Korea and the US follow China, which is also the largest consumer of steel.
Analysts expect Chinese steel demand to stay robust. Similarly, infrastructure rebuilding in the US under President Joseph Biden should add to global demand.
Different steel futures are traded on different exchanges worldwide. For instance, the US Midwest Domestic Hot-Rolled Coil Steel futures are offered on the CME. Over the past year, that commodity has returned more than 217%.
As a result of the increasing steel demand, investors have been buying shares of many global steel producers, including:
- ArcelorMittal (NYSE:MT) – up 281% in the past 12 months;
- Shanghai Baosteel Packaging (NYSE:PKG) – up 62%;
- Hebei Iron and Steel Co Ltd (SZ:000709) – up 34.63%;
- Hyundai Steel (KS:004020) – up 187%;
- Nippon Steel (OTC:NPSCY) – up 131%;
- Nucor Corp (NYSE:NUE) – up 156%;
- POSCO (NYSE:PKX) – up 62%;
- Steel Dynamics (NASDAQ:STLD) – up 183%;
- Tata Steel (NS:TISC) – up 157%;
- United States Steel (NYSE:X) – up 255%;
Against that backdrop here is our ETF for today.
VanEck Vectors Steel ETF
Current Price: $65.04
52-Week Range: $23.49 - $68.22
Dividend Yield: 1.29%
Expense Ratio: 0.56%
The VanEck Vectors Steel ETF (NYSE:SLX) provides exposure to companies in the steel sector. The fund started trading in October 2006, and has $265.8 million in net assets.
SLX, which has 25 holdings, tracks the returns of the NYSE ARCA Steel Index. The top 10 stocks comprise around 75% of the fund.
Two leading iron ore miners, Brazilian Vale (NYSE:VALE) and Australia-based Rio Tinto (NYSE:RIO) have the largest slices with 15.62% and 14.60%, respectively. They are followed by several of the leading players in the global steel industry, such as ArcelorMittal, Nucor, POSCO, Companhia Siderurgica Nacional (NYSE:SID) and Steel Dynamics.
Since the start of the year, SLX has returned more than 45% and hit a multi-year high in recent days. Given the recent run-up in price, short-term profit-taking is likely. However, steel bulls could regard such a decline as a good opportunity to buy SLX. A potential drop toward $60 would improve the margin of safety.
On a final note, readers might also want to do further research on another ETF, namely, the SPDR® S&P Metals and Mining ETF (NYSE:XME). The fund provides access to companies operating in aluminum, coal, copper, precious metals and steel. Year-to-date, XME is up 38% and recently saw a multi-year high. Inflation expectations have been providing tailwinds to the fund.