SLX - SLX: A China-Sensitive Play That's Been Rocketing Lately

2024-01-10 06:30:49 ET

Summary

• VanEck Steel ETF is performing well and offers exposure to the global steel industry.
• China's influence on the steel market makes investing in steel mining stocks potentially lucrative.
• SLX has a concentrated portfolio of 25 companies and offers access to global steel industry growth, but comes with risks.

While Gold has been getting a lot of attention as of late, it's worth noting that there is a lot of big movement happening with Steel mining stocks. For those bullish on a return to industrial activity (particularly coming from China), the VanEck Steel ETF ( SLX ) is worth a look given its pretty strong performance as of late.

SLX is designed for investors seeking exposure to the global steel industry. This ETF follows the NYSE Arca Steel Index, providing an efficient way for investors to invest in a portfolio of companies involved in the steel sector. As the only ETF dedicated to steel equities, SLX offers an efficient and targeted investment opportunity in an industry that's integral to various sectors, including construction, automotive, and infrastructure.

Why did I mention that if you're bullish on China you might want to be bullish on steel mining stocks? Because as the world's largest producer and consumer of steel, the country significantly influences the steel market. China's rapid industrialization and urbanization over the past few decades have led to a surge in demand for steel for infrastructure, construction, manufacturing, and automotive industries. This demand from China drives global steel prices and production levels, and any changes in the Chinese economy can have substantial ripple effects across the global steel industry. China's policies on production and export, as well as its efforts to curb pollution, also play a critical role in shaping worldwide steel demand and supply dynamics.

SLX was launched nearly 17 years ago. It offers access to a concentrated portfolio of just 25 companies, representing the current state of the global steel industry. SLX trades on the NYSEArca exchange and has approximately $134 million in assets under management. I like this as it suggests there hasn't yet been a chase into the fund and the theme overall given the relatively low AUM. The fund trades an average volume of around 17,000 shares daily and comes with an expense ratio of 0.56%, which is in line with the industry average for industry-focused ETFs.

Exploring the Holdings of SLX

SLX's portfolio is made up of a diverse range of steel-related companies, with the top two holdings being Rio Tinto and Vale SA, two leading iron ore producers. Each of these companies constitutes over 10% of the fund's total assets. The other companies in SLX's portfolio include both domestic and international steelmakers, providing global exposure to investors.

Sector Composition and Weightings

SLX's sector composition reflects the varied industries that the steel companies cater to. Domestic stocks account for approximately 47% of SLX's holdings, demonstrating a significant exposure to the US steel industry. Brazil comes in at second with 20% followed by Australia at 11%.

Pros and Cons of Investing in SLX

One of the main advantages of investing in SLX is the exposure it provides to the global steel industry. As steel is a vital component in several sectors, investing in SLX can offer a way to indirectly invest in global infrastructure growth. Moreover, SLX can be an attractive investment during periods of economic expansion when steel demand typically increases.

On the downside, the steel industry is cyclical and can be affected by numerous factors, including global economic conditions, trade policies, and commodity prices. Therefore, investing in SLX can be risky during periods of economic downturn or trade disputes.

The Final Verdict: To Invest or Not to Invest?

The VanEck Steel ETF can be an effective investment vehicle for those seeking exposure to the global steel industry. While it comes with its own set of risks, the potential rewards could be significant, particularly during periods of economic growth and increased infrastructure spending. As always, investors should carefully consider their investment objectives and risk tolerance before investing in any ETF, including SLX.

For further details see: