Steel ETF Soaring: Will The Trend Continue?

The steel industry has been surging lately given the possible tariff talks on foreign producers of steel and aluminum in the interest of national security. Trump is looking to impose severe tariffs of 24% on steel imports and 10% for aluminum imports.

Additionally, President Donald Trump’s latest statement on reviving the industry has bolstered the confidence in the growth of the steel industry. Per Reuters, “Trump wants to bring the steel industry back to America even if his administration will apply tariffs to imports from other countries.” Trump has until Apr 11 to decide on the new steel tariffs, and Apr 16 for aluminum restrictions (read: Trump's 2019 Budget Blueprint: ETF Winners & Losers).

The new tariff will likely curb excess global steel production capacity, especially in China, pushing steel prices higher. This has resulted in a spike in global steel stocks. In fact, many of them like U.S. Steel (NYSE:X) , Steel Dynamics Inc. (NASDAQ:STLD) , Gerdau S.A. (NYSE:GGB) and Ternium S.A. (NYSE:X) skyrocketed to a new one-year high in the past week.

Given this, the only pure play VanEck Vectors Steel ETF (AX:SLX) is also hitting new 52-week highs. The ETF has returned 12.8% so far this year easily outperforming the broad material fund’s XLB gain of 1.3%. Let’s take a closer look at the characteristics and fundamentals of SLX in detail (read: all the Materials ETFs here).

SLX in Focus

This fund provides exposure to a small basket of 27 stocks by tracking the NYSE Arca Steel Index. It is highly concentrated on the top firm, Rio Tinto (NYSE:RIO) , at 11% of assets while other securities hold no more than 8.9% share. This suggests that company-specific risk is high. The product primarily focuses on large caps as it accounts for 45% of the assets while the rest are evenly split between mid and small caps.

American firms dominate the fund’s returns at 37.2%, followed by Brazil (19.1%), the Netherlands (13.3%) and United Kingdom (11.1%). The ETF has amassed $177.6 million in its asset base and charges 55 bps in fees from investors. It trades in moderate volume of 64,000 shares a day on average.

What Lies Ahead?

The outlook remains solid given that shrinking supply glut could restore balance to a global steel market, which was ravaged by a collapse in prices two years ago due to oversupply. Added to the bright picture is the slowdown in China’s steel production growth to just 0.6% for this year. Notably, China is the world’s largest producer of the metal (read: Celebrate Chinese New Year With These ETFs).

As the metal is used in a wide range of industrial applications including infrastructure and cars, global demand will likely increase, thereby leading to higher steel price. Additionally, Trump’s promise to revive U.S. manufacturing and rehabilitate the country’s aging infrastructure will continue to fuel growth in the steel industry. Reduced regulation and tax cuts are also adding to the strength.

Within the Zacks Industry classification, the steel industry falls under the broad basic material sector categorized into three groups — steel producers, steel pipe and tube and steel specialty industries. Though steel pipe and tube is currently placed in a bottom-ranked Zacks industry (bottom 48%), the other two belong to a solid industry rank in the top 38% (read: Top-Ranked Sector ETFs & Stocks From Top Industries).

To sum up, the steel ETF could be a good choice for investors given an improving steel outlook.

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VANECK-STEEL (SLX): ETF Research Reports

SPDR-MATLS SELS (XLB): ETF Research Reports

Rio Tinto PLC (RIO): Free Stock Analysis Report

Steel Dynamics, Inc. (STLD): Free Stock Analysis Report

United States Steel Corporation (X): Free Stock Analysis Report

Ternium S.A. (TX): Free Stock Analysis Report

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Zacks Investment Research