Few exchange traded funds have been as levered to the so-called Trump Trade as the VanEck Vectors Steel ETF (NYSEArca: SLX). The lone ETF dedicated to steel stocks more than doubled last year in anticipation of Donald Trump winning the White House.
However, SLX is scuffling this year as highlighted by a year-to-date loss of 3.4%. SLX tries to reflect the performance of the NYSE Arca Steel Index, which follows global companies involved in the steel industry. Part of the problem are expectations that the Trump Administration will push off its ambitious infrastructure effort until next year.
However, Trump’s plan is likely to be seen as controversial because the White House is targeting deep cuts to entitlement programs, including Medicaid, to offset infrastructure spending.
“A rebound in energy demand, the benefits of trade protection and possible increases in infrastructure spending are expected to offset a modest decline in automotive production and result in better capacity utilization and margin expansion for the North American steel industry, according to Fitch Ratings. The increasing likelihood of a rebound in import competition and a delay in addressing infrastructure spending has resulted in a tempering of earnings expectations compared with the fourth quarter of last year,” according to Fitch Ratings.
Investors will have to keep a close watch over China, the largest producer of steel, which made up half of the 1.6 billion metric tons produced last year. Beijing has cut back production after the international community accused Chinese producers of dumping excess products on the global market.
“Steel production in China (50% of global production) tends to dominate iron ore and metallurgical coal prices, and these inform scrap prices, which in turn inform U.S. steel prices. Falling iron ore and Chinese steel prices, coupled with fairly low U.S. service center inventories, augur declining steel prices in the U.S. Fitch expects China’s exports to return to 100 million tonnes per year and the steel sector to remain oversupplied in the medium term given that capacity cuts to producing mills will be difficult to achieve. This is expected to put downward pressure on global steel prices,” said Fitch.
SLX, which debuted in the fourth quarter of 2006, holds 27 stocks and has $144.2 million in assets under management. Eight countries are represented in the ETF.
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