PRETORIA, South Africa () -- Exchange Traded Funds (ETFs) have proven to be attractive investment vehicles offering a broader range of investors low cost access to alternative investment classes with the benefits of sector diversification. They also provide a convenient reference price index for a range of other derivative instruments.
This has been particularly true in the precious metals markets as global economic and financial conditions are such that bullish conditions have prevailed. Financial intermediaries - broker-dealers, investment banks and exchanges - have been quick to capitalize on the trend and the use of ETFs is growing to include other commodities, both hard and soft.
With steel prices rising sharply during recent years, the American Stock Exchange last October launched its Global Steel Index [AMEX:^STEEL]. Off the back of the index's launch, Van Eck Global launched Market Vectors Steel ETF [AMEX:SLX], which it is touting as the most broadly diversified and cost-effective means for investors to gain exposure to this key industrial commodity.
"Over the past year, steel has reigned supreme on Wall Street," commented a spokesperson for Van Eck. "In fact, steel stocks were up more than 60% in 2006, and have risen more than 20% thus far in 2007. The good news for investors is that starting late last year it got a whole lot easier to get a slice of the pie."
A Great Story
Van Eck's Steel ETF is one of the first and still few investment vehicles of its kind, according to the fund manager. The Amex index is a modified market capitalization weighted index based on the publicly traded shares of 39 steel refiners, manufacturers and iron ore miners, giving investors exposure to a broad range of participants in the global steel market.
ETFs have been instrumental in attracting investment capital and driving up demand in the gold and silver markets as hedge funds and institutional investors have poured more of their clients' capital into commodities markets, adding to the sharp and steep run-up in prices during recent years.
"Steel tells a great story," said the spokesperson for Van Eck. "A round of bankruptcies and restructurings transformed the U.S. industry in the late '90s early 2000's.... However, the industry is now much more global. The SLX is weighted more than 60% non-U.S. [and] valuations are still very low, but the industry is showing itself to be far more profitable than forecast, even in an environment of inventory concerns."
In addition to the predominant iron ore miners such as BHP [NYSE:BHP], Cia Vale do Rio Doce [NYSE:RIO] and Rio Tinto Plc. [NYSE:RTP], the Amex index and Van Eck's ETF include large and small manufacturers such as Mittal Steel Co. [NYSE:MT], Nucor Corp. [NYSE:NUE], South Korea's Posco [NYSE:PKX] and Schnitzer Steel Industries Inc. [Nasdaq:SCHN].
Favourable Conditions
Steel prices have been rising steadily and at times sharply as rapidly developing economies, particularly China's, have driven up demand as well as added to supply.
"Japanese integrated steel makers came to an agreement with CVRD in late December to increase the iron ore fines purchase price by 9.5% for shipment fiscal 2007. Japanese steel makers followed the earlier agreed price between Baosteel and major iron ore producers. This was the fifth consecutive year that the figures have moved up," noted MEPS, a global steel industry analysis and consulting firm based in London.
Global industry consolidation, such as Mittal's hotly contested acquisition of Arcelor, has also contributed to the rise in steel prices and the prices of steel industry shares - and the SLX is reflective of these conditions.
Calculating the index's hypothetical performance between March 30, 2001 and September 30, 2006 showed that the Amex's Global Steel Index would have produced an annualized total return of 23.87% compared to 2.59% for the S&P 500.
That type of performance is extending into 2007.
"The SLX over the past six months is pretty much top of the heap in commodity sector ETFs," said Van Eck's spokesperson. "It has been hitting new highs off and on almost everyday now, and is up almost 20% year-to-date."
Building Liquidity
Akin to other ETFs, Van Eck's SLX offers investors an opportunity to invest in a broad basket of steel industry shares through a single equity trade, thereby gaining exposure to the performance of a diversified portfolio of steel stocks without the risks and transaction costs of investing in single stocks or derivatives.
This being the case, the ETF appeals to a wide range of market participants, including institutions, hedge funds, tactical traders and asset allocators, as well as financial advisors and individual retail investors, according to Van Eck. Like other ETFs, the SLX can be shorted and options series have been listed on the Amex since the fund's launch.
Prices have ranged between US$41.80 and $56.23 and liquidity has been increasing since SLX's debut on October 16, 2006. Average daily trading volume has been approximately 16,600 since that time, but has averaged around 25,500 in the three months ending March 29 and 35,750 shares since February 1 this year, according to Van Eck.