Market Overview

Bet Against Einhorn on Iron Ore With These ETFs

It is now widely known that hedge fund legend David Einhorn is bearish on iron ore producers.

If his comments to that effect in October 2012 did convince investors of that fact, then Greenlight Capital's letter to clients issued earlier this week should do the trick.

In that letter, Greenlight says it holds a bearish view of iron ore equities and that is has "shorted a number of stocks in the sector." Without knowing exactly which iron ore stocks Greenlight is short and when those positions were initiated, grading the success of Greenlight's trades is difficult.

What is known is that Einhorn spoke bearishly about iron ore and steel names as far back as October 2012 and if he opted to short stocks such as BHP Billiton (NYSE: BHP) an Vale (NYSE: VALE), the world's largest iron producer, back then there is a good chance those trades are not going in his favor.

The reason being is that the Chinese economy has started to turn for the better, causing iron ore prices to surge. While there is no exchange-traded product backed by iron ore futures, there are plenty that hold stocks such as BHP and Vale. Investors can use some of the following funds to bet on high iron ore prices while potentially profiting from what could be a rare misstep by Einhorn.

iShares S&P Global Materials Sector Index Fund (NYSE: MXI) Vale, BHP and Rio Tinto (NYSE: RIO) are the world's three largest iron ore producers and that trio combines for almost 18 percent of MXI's weight. That gives this ETF plenty of exposure to increasing demand and prices for the commodity used in the production of steel.

The resurgent Chinese economy has been a boon for MXI as the fund has gained over eight percent in the past 90 days. However, investors need to note exactly what they are getting involved with with MXI. Meaning this ETF is about much more than iron ore production.

MXI is also home to chemicals producers such as DuPont (NYSE: DD) and Dow Chemical (NYSE: DOW) along with fertilizer names such as Potash (NYSE: POT).

Those factors are not the big sticking points with MXI, though. MXI's issue that investors need to be cautious of is exposure to gold miners, one of the more uncooperative sub-segments of the materials universe. In the past three months, the Market Vectors Gold Miners ETF (NYSE: GDX) is off almost 12.5 percent.

MXI's exposure to pure play gold miners is not significant enough to make this ETF a loser as iron ore prices rise, but the fund's exposure to gold mining equities is enough to mute MXI's upside.

iShares MSCI Australia Index Fund (NYSE: EWA) A predictable choice given that Australia is one of the world's largest iron ore-producing countries and that China is Australia's largest trading partner.

BHP, EWA's largest holding, and Rio Tinto combine for over 15 percent of EWA's weight. Both companies are diversified mining firms, but both are also highly dependent on iron ore as a revenue and profit driver.

In 2011 iron ore accounted for 42 percent of BHP's profits. In the same year, Rio Tinto derived nearly half its revenue from iron ore production.

Global X China Materials ETF (NYSE: CHIM) China is often perceived as the primary destination for imported iron ore, but it must be noted the world's second-largest economy is looking to reduce its dependence on imported iron ore.

China is seeking to reduce dependence on imported iron ore by increasing the proportion of domestic iron ore to forty-five percent by 2015.

China is already the world's largest steel producer, so its efforts to increase domestic iron ore production make sense, particularly at a time when prices are rising. Morgan Stanley expects iron prices to average $133 per ton this year and that China will increase shipments 12 percent, according to Bloomberg.

CHIM is small (just $2.8 million in assets under management) and its average daily volume is less than 4,800 shares. On the other hand, the ETF has surged 15.5 percent in the past three months, outperforming the iShares FTSE China 25 Index Fund (NYSE: FXI) by nearly 400 basis points along the way.

For more on ETFs, click here.

Posted-In: News Sector ETFs Short Ideas Specialty ETFs Hedge Funds Emerging Market ETFs Futures Movers & Shakers Best of Benzinga

 

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