A Comprehensive Guide to Mining Industry ETFs - ETF News And Commentary
January 27 2014 - 11:05AM
Zacks
In 2013, iron had an
overall good run compared to other base metals as prices and demand
remained relatively strong. Ramp up in production by the major iron
ore producers, increase in exports from Australia, Brazil and India
will lead to a glut in iron supply in 2014. In case this excess
supply is not matched by adequate demand, it will expose the market
to the risk of a decline in prices.
The fate of iron ore
prices now mainly hinges on Chinese demand. A rebound in
China’s metal imports along with improvement in global
manufacturing will push iron ore prices upward. Furthermore, iron
ore prices will be supported by increased demand from steel markets
in India, Japan and South Korea. (Read: Oil Services ETFs in Focus
on Schlumberger Earnings)
However, aluminum and copper did not enjoy a similar fate in 2013.
As supply outpaced demand, aluminum prices slid downhill and
recorded the lowest in November. Until the market can work its way
out of the oversupply, aluminum producers will continue to face the
brunt in the form of low prices. Furthermore, input costs are
expected to pose challenges for the industry.
In the medium to long term, aluminum consumption is expected to
improve on a global basis driven by the automotive and packaging
industries. The automobile market is becoming increasingly
aluminum-intensive and the global push to improve fuel efficiency
in vehicles is expected to more than double the demand for aluminum
in the auto industry by 2025. (Read: How will the Shipping ETF Sail
in 2014)
For most part of 2013, oversupply and lack of demand kept copper
prices in check. The scenario will continue in 2014 with demand and
supply imbalances. Notwithstanding the current volatility in
prices, we have a long-term bullish stance on copper, supported by
its widespread use, limited supplies from existing mines and the
absence of significant new development projects. Prices will be
influenced by demand from China and emerging markets, economic
activity in the U.S. and other industrialized countries.
Thus, in the metals market on the whole, increased supply and
insufficient demand will continue to exert a downward pricing
pressure on commodities over the short term. However, growth in the
U.S. and an improving global macroeconomic scenario in tandem will
boost demand in the industry. The long-term story for the industry
remains intact as growth in the emerging markets, particularly in
China and India, will be a major driver of metals demand.
ETFs to Tap the Sector
An ETF approach can help spread out assets among a variety of
companies and reduce company-specific risk at a very low cost.
There are currently two ETFs available to play this sector. (See
all Materials ETFs Here)
SPDR S&P Metals & Mining (XME)
Launched in Jun 2006, XME seeks to replicate the S&P Metals and
Mining Select Industry Index. The S&P Metals & Mining
Select Industry Index represents the metals and mining sub-industry
portion of the S&P Total Market Index. With AUM of $589
million, XME is the largest and most popular fund in the metals and
mining space.
It has a trading volume of roughly 2.9 million shares a day,
suggesting little or no extra cost in the form of bid/ask spreads.
The ETF is a low-cost choice, charging a net expense ratio of
35 basis points a year, while the dividend yield is 1.36%
currently.
The fund currently holds 40 stocks in its basket, with only 34.12%
of assets in the top 10 holdings with weightage of around 3% each.
From a commodities perspective, the product is heavily weighted
toward steel with 35% sector weightage, followed by diversified
metal and mining (20%), coal and consumable fuels (16%), precious
metals (11%), gold (10%), and aluminum (8%).
Among individual holdings, top stocks in the ETF include AK
Steel Holding Corporation (AKS), Allied Nevada
Gold Corp. (ANV), and Molycorp, Inc.
(MCP) with asset allocation of 3.82%, 3.74% and 3.56%,
respectively. (Read: MLP ETFs—Still Good for Income Investors?)
iShares MSCI Global Metals & Mining Prdcrs
(PICK)
The ETF seeks to match the price and yield performance of MSCI ACWI
Select Metals & Mining Producers Ex Gold & Silver
Investable Market Index. This index measures the equity
performance of companies in both developed and emerging markets
that are primarily involved in the extraction and production of
diversified metals, aluminum, steel and precious metals and
minerals, excluding gold and silver.
Launched in Jan 2012, the fund has so far attracted AUM of $134
million. It has a trading volume of roughly 19,483 shares a day.
The ETF is currently charging a net expense ratio of 39 basis
points a year, with a dividend yield of 3.58%.
The fund currently holds 240 stocks with 99.66% sector weightage
toward basic materials. The fund allocates nearly 52% of the assets
in the top 10 firms, which suggests that company-specific risk is
somewhat high, as the top 10 holdings dominate half of the
returns.
Among individual holdings, top three stocks in the ETF include
BHP Billiton Limited (BHP), Rio Tinto
plc (RIO) and BHP Billiton plc (BBL)
and with asset allocation of 13.3%, 8.2% and 7.8%,
respectively.
The fund is widely diversified across various countries, and UK
tops the list, holding 21.37% of the fund, followed by Australian
(19.76%) and American securities (14.35%). These three nations make
up for nearly 55% of the assets.
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BHP BILLITN LTD (BHP): Free Stock Analysis Report
ISHARS-M GL M&M (PICK): ETF Research Reports
RIO TINTO-ADR (RIO): Free Stock Analysis Report
SPDR-SP MET&MIN (XME): ETF Research Reports
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