Thursday’s ETF To Watch: Steel ETF (SLX)

by on August 5, 2010 | ETFs Mentioned:

As equity markets have surged in recent weeks, investors have grown increasingly bullish on the manufacturing and construction sectors of the economy. With strong readings out of the Chicago PMI and solid car sales, the immediate future is beginning to look bright for steel companies as the important commodity becomes more in demand. However, a slow down in the world’s largest producer and consumer of the metal alloy, China, threatens to sink the sector and send the shares of various iron ore companies sharply lower. One of the biggest companies which focus on this segment of the steel market is the Anglo-Australian giant Rio Tinto (RTP) which looks to be especially under the microscope today as the company reports its second quarter earnings.

Rio Tinto is currently one of the five largest publicly traded mining firms in the world and the second largest iron ore miner producing volume of close to 150 million tons. Iron ore represents a huge input cost for steelmakers so if there are sharp increases in iron ore in the company’s forecast it could signal rising costs for much of the steel industry. However, this could also signal robust steel demand which is likely to be good news for companies higher up the value chain as well. Overall, the company’s guidance for the rest of the year given the slowdown in Chinese demand will be the main story of today’s earnings report and help to give further direction to the surging sector [see Top Ten Performing ETFs Since The Market Bottom].

RTP’s first half net profit is expected to more than double, buoyed by strong performance in the iron ore division and a $230 million gain from the sale of two undeveloped coal assets. Analysts will seek an update on how volatile pricing and concerns about a Chinese slowdown will affect the company’s shipments and pricing in the future. Another area of focus will also be company’s new projects to stimulate growth especially the expected costs to expand Pilbara and develop Simandou iron ore project in Guinea which will be of particular concern to other companies in the steel industry [see Three Sector ETFs With Sky High Betas].

Due to this crucial earnings report, we have decided to make the Market Vectors Steel Index ETF (SLX), today’s ETF to watch. The fund tracks the NYSE Arca Steel Indexwhich provides exposure to publicly traded companies primarily involved in a variety of 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. The fund currently holds 29 securities with large allocations going towards Vale (12.4%), Rio Tinto (11%), and ArcelorMittal (9.4%) with a heavy focus on international securities which makes up close to two-thirds of the SLX’s total assets. In terms of market capitalization level exposure, Market Vector’s steel fund allocates roughly one third to both giant and medium cap equities ensuring a reasonable level of diversification across varying company sizes [see more information on SLX's fact sheet]

SLX has been surging as of late thanks to increasing optimism over the health of the manufacturing and construction sectors, especially in developed markets. Although SLX is up just 1% so far in 2010 it has produced a gain of 16.9% over the past month and pays out a robust dividend of more than 3.1%. Look for this upward trend to be put to the test by iron ore giant Rio Tinto in today’s trading [also make sure to read What Every Investor Needs To Know About Commodity ETF Investing].

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Disclosure: No positions at time of writing.