A new steel-sector-based exchange-traded fund that quietly debuted this week on the American Stock Exchange could prove useful in playing several roles within a diversified portfolio.
Market Vectors Steel ETF
from Van Eck mimics the newly created Amex Steel Index but has more moving parts than just the obvious steel effect.
First, more than 60% of the ETF is foreign stocks, of which roughly half come from emerging markets.
Brazil has the largest country weight, accounting for just over 20%; South Korea, by virtue of a large position in
, also has heavy weighting in the fund, as does Australia.
The Van Eck Web site does a great job providing data to help investors get a feel for how volatile this fund could be. The volatility for the Amex Steel Index is around 30, which compares to 10.3 for the
Due to the heavy exposure in emerging markets, the fund has what seems like a low price-to-earnings (P/E) ratio of 10.95.
But emerging markets usually trade with lower P/Es than the levels we're accustomed to in the U.S.
Even domestic steel companies usually trade with low P/Es --
, which is the largest U.S. name in the fund, trades with a P/E of less than 12, for example, and
trades at less than 10 times earnings.
Van Eck also notes that the fund has a fairly low correlation of 0.62 to the S&P 500 and a 2.18 beta against gold bullion. Beta vs. gold is an unusual statistic to include.
The fund's largest holding,
Companhia Vale do Rio Doce
, only has a 0.44 correlation to gold as measured by
streetTRACKS Gold Trust
. Second-largest holding
( RTP) has a 0.60 correlation, No. 3
a 0.28 correlation, and No. 4 Posco a 0.32.
Those four stocks account for 45%, which is evidence that the beta vs. gold may not mean much.
It makes sense to assume that this ETF will draw a lot of volume once people know about it, and it therefore could prove volatile.
If you are more of an investor-type and are considering the fund, be sure you'll be able to monitor the fund's many moving parts.
First, you'll need to watch the country weightings. Brazil is a biggie, and the country is going through a presidential election this fall that has the potential to be market-moving. Brazil also has volatile economic data and, at times, the currency can make big moves.
Do I even need to remind you to keep tabs on the Koreas? (Posco is based in South Korea.) The point is that the markets captured in the fund are dynamic and do require some minding.
What about steel itself?
The chart below compares the Dow Jones Steel Index, which is different than the index that underlies SLX, and the
Materials Sector SPDR
Steel clearly led materials as the economic cycle was still expanding. Now as talk of slowdown in the economy is building, steel appears to be rolling over vs. the broader sector.
If the economy is indeed slowing, which is normal, it would make sense to assume that steel would lag. Further down the road, of course, any slowdown or recession would end, a recovery would ensue and steel would be likely begin to outperform again.
DJ Steel Index vs. Materials Sector SPDR
At the time of publication, Nusbaum's client holdings included net long positions in XLB, RIO and GLD, although positions may change at any time.
Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, Ariz., and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback;
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