We have spent some time in past recaps discussing metals exchange traded funds including platinum, gold, silver and copper for instance. Today we analyze the two ETF choices in the steel space, as they are both structured to deliver exposure to equities that are involved in the production of steel and steel products, as well as extracting iron ore, which is the main component in the production of steel itself.
SLX (Market Vectors Steel) tracks the NYSE Arca Steel Index, and provides truly global exposure, as the top holdings are all internationally based companies including VALE, RIO, PKX, MT, and SID.
The other entrant in the space is PSTL (PowerShares Global Steel) is based on the NASDAQ OMX Global Steel Index and differs from SLX in that it invests mostly in ordinary shares, or locally listed shares in steel related equities, as well as some ADRs and GDRs.
SLX on the other hand is typically made up of U.S. listed ADRs, with some of the same names represented in the index as PSTL, just with the nuance of ADR versus ordinary shares. For instance, top holdings in PSTL currently are ordinary shares in Vale S.A., Posco, ArcelorMittal SA, Nippon Steel Corp. and Kumba Iron Ore Limited.
Both ETFs have been hit hard in 2011, with SLX losing 37.85% and PSTL down 39.63% versus the S&P 500 falling 7.58%. In fact, both ETFs are within shouting distance of their lowest levels traded at since 2009 (in early October of this year both SLX and PSTL registered new multiyear lows) after last week’s drubbing.
The steel industry is thought of as being closely tied to the economies of the emerging markets, specifically China and Brazil, as investment in infrastructure generally requires steel and steel related products. With the Chinese and Brazilian equity markets both down well over 20% apiece in 2011, this is clearly a reflection of an economic slowdown that has been underway from a global standpoint which has hampered overall consumer and industrial demand for steel not only in construction and build outs in infrastructure, but also in slowing global auto sales.