NEW YORK (
) -- A weak dollar and emerging-market demand continue to propel the
Market Vectors ETF
skyward in 2009.
During the one-year period ended Nov. 20, SLX was up more than 200%. If economic conditions persist, there's reason to believe that this ETF, which tracks steel companies like
( RTP) and
(VALE), will continue to gain steam.
The perfect storm brought on by the economic crisis battered the steel industry over the past several years. A weakening in construction and auto sales dragged down steel prices, depressing the type of companies tracked by a fund like SLX. Over the past year, however, growing demand in emerging markets like China has helped to boost steel and the stocks of companies that deal in its production.
In addition to RTP and VALE, the top five holdings in SLX's portfolio also include
While all of SLX's 27 underlying components are listed in the U.S., nearly 60% of the portfolio is staked in international companies. The use of U.S.-traded equities in the underlying portfolio helps to ease the ability of SLX traders to hedge the fund during the day, while providing investors with exposure to an international portfolio.
To be considered for inclusion in SLX's underlying portfolio, components must first be primarily involved in activities related to steel production such as mill operation, steel fabrication, and the extraction and reduction of iron ore. To ensure liquidity in the underlying basket, the market capitalization of each component must be greater than $100 million.
While SLX offers investors the unusual opportunity to track producers of this particular hard asset, it is not the only ETF to do so. The
PowerShares Global Steel Portfolio
, launched in September of 2008, offers access to U.S.-listed and international steel companies. Year to date, PSTL is up 56%. During the same period, SLX has advanced 98%.
The difference in performance can be traced to the weighting of out-performing companies like RTP and VALE in the two portfolios. PSTL, which has 60 components to SLX's 27, has a lower concentration of assets in its top components. More than 48% of SLX assets are allocated to its top five holdings, while just 36% of PSTL's assets are allocated to its top five holdings.
Concentration in top weightings can help to boost an ETF's performance when these companies outperform index rivals. A larger, and more diversified, fund like PSTL can provide investors protection from security specific risk over the long haul, however.
Thus far, investors have favored SLX as the steel-ETF-of-choice. SLX has the advantage of being the first mover in the Steel ETF space, having launched in 2006, and the fund has a three- month average daily trading volume of 403,000 shares. PSTL, by comparison, has an average daily trading volume of 7,340 shares. The relative expense ratios of SLX and PSTL, 0.60% and 0.75% respectively, may have also helped to sway investors towards SLX.
The demand for steel in emerging markets continues to be strong, and a weak dollar is helping the companies that comprise the SLX portfolio. While this fund has already advanced a significant amount in the past year, risk-tolerant investors may still have time to cash in.
-- Written by Don Dion in Williamstown, Mass.
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At the time of publication, Dion did not have any positions in the equities mentioned.
Don Dion is president and founder of
, 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.
Dion also is 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.