Market Overview

A Comprehensive Guide To Mining Industry ETFs - ETF News And Commentary

The rise in global population, growth in the Chinese economy, urbanization of the Asian countries and increasing requirements of the developed countries have created an unprecedented demand for minerals and metals. The metals & mining industry caters to this ever-rising demand through extraction (mining) and primary and secondary processing of metals. However, of late, the tepid global economic growth and a slowdown in the Chinese economy have emerged as major headwinds for the metal industry worldwide.
 
Let's have a sneak peak at what is in store for the major industrial metals ― Iron, aluminium and copper. (Read: Inside the Volatility ETF Crash; Is a Rebound Coming?)
 
Iron: There is a threat of oversupply in 2014 as major iron ore producers, Rio Tinto plc (NYSE: RIO), BHP Billiton Ltd. (NYSE: BHP) and Fortescue Metals Group Ltd. (FMG.AX) have ramped up production in Australia, betting on continued strength in iron ore demand over the long term. Thus, Australia, the world's top exporter of iron ore, will continue to increase its shipments followed by Brazil and India.

An impending slowdown in China's growth is bound to affect prices as it is currently the largest producer of steel and consequently the largest consumer of iron ore, accounting for around 60% of the global seaborne market. Thus, the mismatch between the excess supply and demand for iron ore will keep iron ore prices subdued in the near term.
 
Aluminium: Having endured the ill consequences of a chronic surplus, the global aluminium industry is going through a substantial change. Companies like Rusal and Alcoa Inc. (NYSE: AA) have cut back on production and taken up a number of restructuring measures (including closure of smelters), and are aggressively pursuing cost-cutting measures. (Read: 3 Commodity ETFs beating the market in 2014)
 
On the demand side, aluminum consumption is expected to improve throughout the world, spurred by the automotive and packaging industries ― the key consumer markets. The automobile market is becoming increasingly aluminum-intensive, given the metal's recyclability and light-weight properties. The global push to make vehicles more fuel efficient is expected to more than double the demand for aluminum in the auto industry by 2025. The airline industry is also expected to boost demand for the light metal.

Following China, which accounts for over 40% of the global aluminum consumption, India appears promising as its current low level of aluminum consumption and high urban population growth make a favorable combination. With demand remaining strong and the industry pulling the reins on supply, the aluminum market is likely to witness deficits for a prolonged period which creates a supportive backdrop for high aluminum prices.
 
Copper: Prices will be under pressure in 2014 due to 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. (Read: Sell Ranked funds to avoid—Copper ETFs)
 
Overall Industry Outlook

Overall in the metals market, increased supply and insufficient demand exerted a downward pricing pressure on commodities and this trend is expected to continue over the short term. Additionally, cost inflation is expected to be a headwind for metal and mining companies over the next several years, driven by a number of factors: labor, energy, ore grades, currencies, supply constraints and taxes. Global economic uncertainties, softening commodity prices and higher input costs are increasing the pressure on company margins.

To combat this, mining and metals companies are reviewing their portfolios to identify and shut down or divest these high-cost, underperforming and non-core assets. Industry consolidation, automation technology, owner-operated mines and investment in energy assets are some of the steps that these companies are taking to mitigate the impact of rising costs.
 
Growth in the U.S. and an improving global macroeconomic scenario in tandem will boost demand in the industry. Revival of the Chinese economy will be instrumental in driving growth in the industry.
 
ETFs to Tap the Sector
 
An ETF approach can help to spread out assets among a variety of companies and reduce company-specific risks 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 (ETF: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 $640 million, XME is the largest and most popular fund in the metals and mining space. It has a trading volume of roughly 0.8 million shares a day. The ETF is a low-cost choice, charging a net expense ratio of 35 basis points a year, while the dividend yield is 1.33% currently.
 
The fund currently holds 40 stocks in its basket, with a concentrated focus on small caps with large caps making up about 9% of assets. It puts only 36.23% of assets in the top 10 holdings. From a commodities perspective, the product is heavily weighted toward steel with 38% sector weightage, followed by diversified metal and mining (18%), coal and consumable fuels (17%), aluminum (8%), gold (8%), silver (5%) and precious metals (3%).
 
Among individual holdings, top stocks in the ETF include U.S. Silica Holdings, Inc. (NYSE: SLCA), Allegheny Technologies Inc. (NYSE: ATI) and Peabody Energy Corp. (NYSE: BTU) with asset allocation of 4.14%, 3.87% and 3.84%, respectively.
 
iShares MSCI Glbl Metals & Mining Prdcrs (ETF: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 mainly 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 $158 million. It has a trading volume of roughly 13,987 shares a day. The ETF is currently charging a net expense ratio of 39 basis points a year, with a dividend yield of 3.42%.
 
The fund currently holds 247 stocks with 97% sector weightage toward basic materials. The fund allocates nearly 53% of the assets in the top 10 firms, which suggests that company-specific risks are 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, Rio Tinto plc and BHP Billiton plc (NYSE: BBL), with asset allocation of 12.84%, 7.88% and 7.78%, respectively.
 
The fund is widely diversified across various countries, and Australia tops the list, holding 26.3% of the fund, followed by United Kingdom and the United States. These three nations constitute nearly 47.38% of the assets.
 
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SPDR-SP MET&MIN (ETF:XME): ETF Research Reports
 
ISHARS-M GL M&M (ETF:PICK): ETF Research Reports
 
BHP BILLITN LTD (NYSE: BHP): Free Stock Analysis Report
 
RIO TINTO-ADR (NYSE: RIO): Free Stock Analysis Report
 
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The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

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