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2 Reasons to Tap Pure-Play Steel ETF Now

Sanghamitra Saha

President Trump announced last March the imposition of a 25% tariff on steel imports and a 10% tariff on aluminum imports. Although steel is faced with duties and consequent retaliatory tariffs that the European Union and others imposed, overall the move benefited U.S. steel companies.

Both Nucor Corporation (NUE) and Steel Dynamics Inc (STLD) indicated that higher steel selling prices and shipments during 2018 benefited the companies. The benefits actually more than made up for the uptick in some raw material prices. Both companies are shelling out billions to construct new steel processing facilities.

Upbeat Earnings

Nucor Corporation saw its profits jump in fourth-quarter 2018 on the back of higher year-over-year steel prices and shipments. The steel giant logged net earnings of $646.8 million or $2.07 per share, up roughly 68% from $383.9 million or $1.20 registered a year ago. Earnings per share also topped the Zacks Consensus Estimate of $1.93. Nucor raked in net sales of $6,295.9 million for the reported quarter, up roughly 24% year over year. The figure also outpaced the Zacks Consensus Estimate of $6,289.3 million.

Steel Dynamics Inc.’s adjusted earnings for the fourth quarter came in at $1.31 per share, which topped the Zacks Consensus Estimate of $1.25. Net sales in the quarter shot up around 24% year over year to $2,903.9 million on higher steel shipments and prices. But it fell short of the Zacks Consensus Estimate of $2,918.8 million.

Vale Tailings Dam Tragedy

The recent collapse of Vale SA’s (VALE) tailings dam is likely to push up iron ore prices, which is one of the inputs of steel. The Brazilian company said it will reduce output by about 10% by suspending operations at mines producing 40mn tons of iron ore, following the tragedy. The concerns related to supply crunch is giving a boost to iron prices (read: ETFs to Watch as Vale Collapses on Tailings Dam Tragedy).

Given this, the only pure play VanEck Vectors Steel ETF (SLX) is likely to stay strong. The ETF has returned 12.4% so far this year easily outperforming the broad material fund’s XLB gain of 5.9%. Let’s take a closer look at the characteristics and fundamentals of SLX in detail (read: all the Materials ETFs here).

SLX in Focus

This fund provides exposure to a small basket of 26 stocks by tracking the NYSE Arca Steel Index. It is highly concentrated on top three firms, Rio Tinto (11.88%), Vale (11.88%) and Ternium (9.22%). This suggests that company-specific risk is high. The product primarily focuses on large caps as it accounts for 45% of the assets while the rest are evenly split between mid and small caps.

American firms dominate the fund’s returns at 36.2%, followed by Brazil (20.7%), the Netherlands (14.4%) and Australia (11.9%). The ETF has amassed $62.8 million in its asset base and charges 56 bps in fees from investors. It trades in moderate volume of 64,000 shares a day on average.

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