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
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.
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,
( RTP), is currently facing criticism over a planned joint venture with rival
. 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.
The announcement of the alliance came after Rio Tinto shuttered its $19.5 billion alliance with
Aluminum Corp. of China
or Chinalco. The failed Chinalco/Rio Tinto deal is a timely illustration of the obstacles faced by resource-hungry countries seeking to reduce import costs in commodities markets dominated by big players. Along with BHP and Brazil's
Cia. Vale do Rio Doce
, RTP controls about 70% of the market for iron ore exports.
An investment in any single commodity fund, such as SLX, is volatile and should only be a piece of a well-diversified investment picture. When it comes to individual commodity funds, however, SLX is as good as it gets.
While SLX is a focused-sector fund, it is far more liquid than many of the other single commodity ETFs, like
products. With a three-month average daily trading volume of more than 400,000 shares, interested investors can participate in the steel rally and maneuver in and out of SLX with relative ease despite the concentrated and focused nature of sub-sector fund.
At the time of publication, Dion had no positions in the stocks mentioned.
Don Dion is the publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.
Dion is also president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.