2023-04-19 16:29:12 ET
Summary
- Commodities are the backbone of the industry and our way of life.
- Most investors use ETFs to cover broad areas of investable stocks. If you want to cover the metals and mining sector, I believe you are not well served with this ETF.
- This is a very concentrated, low-diversified ETF with only 35 stocks that are heavily weighted in steel and coal.
Investment Thesis
The SPDR S&P Metals and Mining ETF (XME) is a very concentrated, low-diversified ETF with only 35 stocks that is heavily weighted in steel and coal. Therefore, I think the ETF is not a good choice for long-term investment in the mining sector. In addition, this strong concentration makes the performance very dependent on the steel price. I think there are better alternatives for longer-term investment in the mining sector.
ETF Overview
XME invests in stocks across the materials, metals, and mining sectors and tracks the "S&P Metals & Mining Select Industry Index" by using a "representative sampling technique" and is " modified equal weighted ." It currently has $2.18B in assets under management, and the yearly expense ratio is 0.35%. The ETF contains only 35 stocks, so I think it's okay to list them all:
Name | Ticker | Weight | Sector |
Hecla Mining Company | HL | 5.461788 | Silver |
Royal Gold Inc. | RGLD | 5.311469 | Gold |
Newmont Corporation | NEM | 4.986851 | Gold |
Freeport-McMoRan Inc. | FCX | 4.823286 | Copper |
CONSOL Energy Inc | CEIX | 4.612945 | Coal & Consumable Fuels |
Peabody Energy Corporation | BTU | 4.440705 | Coal & Consumable Fuels |
Commercial Metals Company | CMC | 4.331411 | Steel |
Reliance Steel & Aluminum Co. | RS | 4.304430 | Steel |
ATI Inc. | ATI | 4.277275 | Steel |
Alpha Metallurgical Resources Inc. | AMR | 4.273597 | Steel |
United States Steel Corporation | X | 4.186260 | Steel |
MP Materials Corp Class A | MP | 4.133729 | Diversified Metals & Mining |
Nucor Corporation | NUE | 4.032026 | Steel |
Alcoa Corporation | AA | 3.940901 | Aluminum |
Cleveland-Cliffs Inc | CLF | 3.862745 | Steel |
Arch Resources Inc. Class A | ARCH | 3.830184 | Coal & Consumable Fuels |
Steel Dynamics Inc. | STLD | 3.819172 | Steel |
Piedmont Lithium Inc | PLL | 3.397866 | Diversified Metals & Mining |
Coeur Mining Inc. | CDE | 2.773244 | Gold |
Uranium Energy Corp. | UEC | 2.740391 | Coal & Consumable Fuels |
Century Aluminum Company | CENX | 1.961380 | Aluminum |
Arconic Corp. | ARNC | 1.838543 | Aluminum |
Enviva Inc | EVA | 1.682066 | Coal & Consumable Fuels |
Materion Corporation | MTRN | 1.615869 | Diversified Metals & Mining |
Compass Minerals International Inc. | CMP | 1.577960 | Diversified Metals & Mining |
Carpenter Technology Corporation | CRS | 1.566477 | Steel |
Worthington Industries Inc. | WOR | 1.168110 | Steel |
Kaiser Aluminum Corporation | KALU | 0.937644 | Aluminum |
TimkenSteel Corp | TMST | 0.853743 | Steel |
Schnitzer Steel Industries Inc. Class A | SCHN | 0.809923 | Steel |
SunCoke Energy Inc. | SXC | 0.784499 | Steel |
Ryerson Holding Corporation | RYI | 0.714342 | Steel |
Olympic Steel Inc. | ZEUS | 0.478364 | Steel |
Haynes International Inc. | HAYN | 0.417100 | Steel |
As you can see, the ETF is very concentrated, and if we break down the sectors, you can see a strong allocation towards steel and coal, which alone account for 56% of the ETF.
Sector | Weight |
---|---|
Steel | 39.90% |
Coal & Consumable Fuels | 17.32% |
Gold | 13.08% |
Diversified Metals & Mining | 10.73% |
Aluminum | 8.68% |
Silver | 5.46% |
Copper | 4.83% |
One thing that strikes me is that many big names are missing: Rio Tinto (RIO), BHP (BHP), Glencore (GLNCY), Vale (VALE), etc. Also missing are sectors like lithium. On the official website, we find this passage:
Seeks to provide exposure to the metals & mining segment of the S&P TMI, which comprises the following sub-industries: Aluminum, Coal & Consumable Fuels, Copper, Diversified Metals & Mining, Gold, Precious Metals & Minerals, Silver, and Steel
Given this strong concentration on a few sub-sectors, I find the name of the ETF somewhat misleading. Someone investing in an ETF named "Metals and Mining" would probably not expect this concentration on steel and coal. On the other hand, a competing ETF from iShares with the ticker " PICK " consists of more than 290 positions and is, therefore, much broader. Also, large companies like Glencore already cover many metals within one company.
Valuation & Dividend
According to the official website, the average forward P/E ratio is 9.49, which sounds cheap, but this is not unusual for this cyclical industry. Furthermore, it also states that the estimated EPS growth for the next 3 - 5 years is in negative territory, -4.69%. Depending on how the global economy develops and whether we see a recession is very crucial for steel producers.
Pessimism seems to prevail in the EPS outlook. The fact that OPEC is cutting oil production to keep the price stable at a rather high level does not help either. If oil were cheap, Basic Materials miners would benefit greatly, but it does not look like we will fall to oil prices below $50 soon. High oil prices and the threat of recession put double pressure on the companies in this ETF: high production costs and weaker demand.
As expected, the dividend here is highly volatile. There are always quarters where the dividend is higher, but it is not rising steadily. Depending on the current price of the ETF, you can get in now and then at slightly higher dividend yields, but it went over 4% in the last ten years only once, and currently, we are somewhat on the average.
Performance
The performance is highly volatile and underperformed the S&P500 over ten years. However, the ETF has strongly outperformed in the wake of inflation and global turmoil in commodity markets.
But overall, we see that steel prices tend to return to their long-term average. Of course, it is difficult to say what will happen next; at the moment, demand is picking up in China but falling in Europe. There is also the threat of a recession in at least the Western world.
I have looked at some of the steel stocks individually, and all I have seen have EPS contractions predicted for at least 2023 and 2024. These stocks include CMC, RS, AMR, and X. If these forecasts are correct, I would consider some of those stocks overvalued at current prices, but I have only looked at them briefly, and a detailed analysis would have to be made first.
For Whom Is The ETF Suitable, And For Whom Not?
From my point of view, the ETF is not a good choice to invest in the metals & mining sector in the long term. The ETF is too concentrated on too few sub-sectors, and many large companies are missing. For example, the ETF consists of 5% copper stocks but contains only 35 stocks in total. That means 1 or 2 copper stocks are included here, which does not even remotely cover the entire sector, and the same applies to all other sectors.
The ETF may be suitable if you invest in many ETFs and want to precisely control the concentration of individual sectors. For example, one could buy one ETF only for oil, another only for copper, another for lithium, etc. In such a construct, this ETF could make sense.
Conclusion
An ETF must always fit into one's strategy. Most investors use ETFs to cover broad areas of investable stocks. If you want to cover the metals and mining sector, you are not well served with this ETF for the mentioned reasons. I regularly invest in an ETF from VanEck, which consists of 166 stocks, because I think commodities are the backbone of the industry and our way of life.
For further details see:
The SPDR S&P Metals and Mining ETF Is Not Diversified Enough