The steel industry has taken a beating over the past two years, as prices and demand have fallen in tandem with the overall market, erasing years of gains in many steel equities. This near collapse was brought on by a perfect storm of events against the steel industry; a severe downturn in the construction industry, depressed automotive sales, and shaky debt markets that made it difficult for capital-intensive steel companies to refinance loans. Steel demand is projected to fall about 8.6% in 2009, and with nearly two-thirds of U.S. steel produced from scrap, some analysts to predict weak prices for the remainder of the year and into the next decade as well.
However, some can begin to see good times returning to the steel industry in the near future thanks to robust levels of growth in emerging market countries. The BRIC nations in particular are carrying global steel demand, with China and India leading the way thanks to their massive economies and steel’s role in many modern components including railroads, cars, buildings other aspects of infrastructure that China and India need in order to industrialize their economies.
India’s Minister of State for steel called for a doubling of India’s steel production in 5 years to over 100 million tons in order to keep pace with growing demand, while China has increased spending on infrastructure and construction and will now account for 47.7% of steel use worldwide. Due to these factors, the World Steel Association predicts that steel demand will grow 9.2% in 2010 and sees steelmakers beginning to restart mills that were shut down in the recession across the world.
For investors looking to participate in a potential recovery and rally in the steel industry, there are two ETF options that offer targeted exposure to the sector: Van Eck’s Steel ETF (SLX) and PowerShares’ Global Steel Portfolio (PSTL). While these ETFs are similar in the exposure offered, there are a number of differences between the funds as well. Below is a look at how these two steel ETFs stack up. For more head-to-head comparisons of similar ETFs, sign up for our free ETF newsletter.
Usually two ETFs within a narrow sector have only a few small differences in underlying holdings. That is certainly not the case for the steel ETFs, as there are major differences between the two, both in market capitalization and geographical weighting. SLX is strongly weighted towards large cap firms, with 68.5% of the fund in companies larger than $5 billion. PSTL has a a lesser weighting to large caps (58%), and makes up for it with a more generous weighting to medium and small sized firms. SLX is also much more concentrated, holding 27 firms compared to PSTL’s 60. The geographical breakdown is also very different with PSTL holding 37.3% in Asia, 17.9% in Europe, and roughly 11% in both North and South America. SLX on the other hand, focuses on North American equities with nearly 40% of the fund’s holdings in that area, followed by Europe (31%) and South America in third (22%).
|Allocation to Large Caps*||68.5%||59.8%|
|North America Allocation*||40.2%||10.7%|
|*Reflects index data as of 9/30 for SLX, fund data as of 11/5 for PSTL|
The indexes related to these ETFs are similar, but different in some key respects. SLX, an ETF from Van Eck, follows the NYSE Arca Steel Index, which provides exposure to publicly traded companies primarily involved in activities that are related to steel production, including the operation of manufacturing mills, fabrication of steel products, or the extraction and reduction of iron ore.
PSTL, a PowerShares ETF, follows the NASDAQ OMX Global Steel Index, which is designed to measure the overall performance of globally traded securities of the largest and most liquid companies involved in the manufacturing and storage of iron and steel products.
SLX has an expense ratio of 0.55% and is up more than 85% year to date, while PSTL which charges 75basis points, has produced a 50% year-to-date gain. However, according to RiskGrades.com SLX is slightly riskier than PSTL, receiving a risk grade 5% higher. This shouldn’t be surprising to investors given the recent volatility in American steel companies and the U.S. dollar in general.
While both funds offer investors access to global steel equities, they invest in very different ways. SLX is more appropriate for investors who are bullish on American steel companies, while PSTL caters to investors who are looking for exposure to steel companies in emerging markets. PSTL has a higher P/E ratio and lower dividend yield than SLX, positioning it as more of a growth play, whereas SLX may fit in better in a value-focused strategy.
With a fragile recovery underway, steel ETFs may be subject to significant volatility in coming months, but the sector still has tremendous room on the upside if domestic demand recovers and the emerging markets continue to expand their infrastructure and manufacturing economies.
Disclosure: No positions at time of writing.