A Solid Steel ETF

Don Dion is the president and chief investment officer of Dion Money Management and the publisher of the Fidelity Independent Adviser family of newsletters. He provides commentary on the financial markets, with an emphasis on exchange-traded funds and mutual funds.

As demand from emerging markets fuels the need for raw materials, companies that extract iron ore and produce steel are on the rebound. While a cloud of uncertainty hangs over the global economy, the demand for steel is surging.

Preliminary figures from China's Ministry of Transportation estimate that the country's imports of iron ore for the month of May are up 25% year over year, totaling more than 55.5 million metric tons. The Market Vectors Steel ETF(SLX) has returned 96.88% for the three-month period ending June 8 and nearly 57% year-to-date. China's $300 billion commitment to improve infrastructure coupled with rising demand for ore from both Chinese and European steel-makers should continue to help SLX rise further in 2009.

SLX tracks NYSE Arca Steel Index, comprised of companies related to steel production including the operation of manufacturing mills, fabrication of steel products, or the extraction and reduction of iron ore. North America, Asia, Europe and South America have 41.4%, 36.5%, 31.5% and 20.9% respective weightings in the index.

While the price of SLX is closely tied to the price of physical steel, it is also important for perspective investors to remember that the fund is composed not of physical steel, but of the stocks of steel companies. Because nearly 61% of the fund's assets are concentrated in the top 10 holdings, news from these companies will affect the underlying value of SLX.

SLX's top holding, Rio Tinto(RTP), is currently facing criticism over a planned joint venture with rival BHP Billiton(BHP). The iron ore deal, which would ally two of the world's largest ore producers, has drawn the ire of Chinese and European trade groups who fear that Rio Tinto and BHP could use the alliance to hike up import prices and pose a threat to competition.