Behold: An Easy Way to Profit Off Steel's Inevitable Recovery
Jul 4th 2012 6:08PM
Updated Jul 5th 2012 10:50AM
Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the steel industry to prosper over the long haul, as the world's economies recover and construction, infrastructure, and manufacturing work heats up, the Market Vectors Steel ETF (NYS: SLX) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.
ETFs often sport lower expense ratios than their mutual fund cousins. The steel ETF's expense ratio -- its annual fee -- is 0.55%. The fund is fairly small, too, so if you're thinking of buying, beware of occasionally large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.
This ETF has not been kind to shareholders in recent history, underperforming the world markets over the past three and five years. But it's the future that matters most, and our long-struggling global economy will eventually perk up. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
With a tiny turnover rate of 3%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.
What's in it?
Few steel companies had strong performances over the past year. Mexico-based Grupo Simec (NYS: SIM) was a rare exception, rising 24%. It specializes in steel for the auto industry and the nonresidential construction industry, and has benefited from a pickup in car sales. In its last quarter, total revenue jumped 24% and profit margins grew as well.
Most other steel companies didn't do as well last year, but they could see their fortunes change in the coming years. ArcelorMittal (NYS: MT) , the world's leading steel company, sank some 55%. Bulls like its geographic diversification and its vertical integration, as it has been buying mines. Softness in Europe has hurt it, but some growth should come from China, despite that nation's own slowdown. It, too, serves the auto market, and is heavily involved in emerging markets.
AK Steel (NYS: AKS) , meanwhile, makes a lot of steel for the electrical power and distribution industry. Its stock has sunk some 62% over the past year, with bears worried about its steep (and growing) debt level and poor cash flow. Pension-funding obligations are another concern, cited by Wall Street analysts.
Cliffs Natural Resources (NYS: CLF) shed 46%, mining iron ore and metallurgical coal used in steel production. The company has been pressured by China's slowdown and also by rising production costs. China is still growing, though, and Cliffs' recent purchase of Consolidated Thompson can help it do more business there.
The big picture
Long-term demand for steel isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.
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At the time this article was published Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, holds no position in any company mentioned. Check out her holdings and a short bio. The Motley Fool owns shares of Arcelor Mittal. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.
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