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Can This Steel ETF Bounce Back From Tough Times?

The global economy has gone through a difficult period in recent years, and steel stocks have suffered the brunt of slowdowns in the infrastructure and construction industry. With demand for steel weak, and with Chinese steel producers charging rock-bottom prices for the strong metal, steel companies saw their stocks perform badly for a long time.

The outlook for steel has gotten better in 2017, as the Trump administration has promised greater spending on infrastructure programs that could get demand moving back in the right direction. One specialty steel ETF offers more concentrated exposure to the steel industry than its peers, but some other fund choices give more diversification.

Steel/Materials ETF

Assets Under Management

Expense Ratio

5-Year Average Annual Return

VanEck Vectors Steel (NYSEMKT: SLX)

$146 million

0.55%

(0.2%)

SPDR S&P Metals & Mining (NYSEMKT: XME)

$702 million

0.35%

(4.8%)

Materials Select Sector SPDR (NYSEMKT: XLB)

$3.6 billion

0.14%

11.1%

Vanguard Materials (NYSEMKT: VAW)

$1.9 billion

0.10%

11.7%

Data source: Fund providers.

Steeling itself through adversity

The VanEck Vectors Steel ETF is designed to duplicate the performance of a specially crafted index of steel stocks. All 27 of the stocks in the ETF's portfolio are involved in some way in the steel industry, although some of the companies are broader conglomerates that have extensive operations in other areas as well.

The most surprising thing about the VanEck steel ETF is its geographical diversity. U.S. companies make up just 40% of its assets, with double-digit percentages coming from Brazil, the U.K., and the Netherlands. Allocations to tax havens like the Bahamas and Luxembourg reflect company headquarters rather than actual steelmaking operations, but small allocations to South Korea and Russia accurately indicate steel production within those countries.

The VanEck steel ETF hasn't done well over longer periods of time, but recently, it has bounced back substantially. The fund boasts a 40% gain over the past year amid rising optimism for the industry, and investors hope the good times can continue.

Image source: Getty Images.

What other ETFs offer steel exposure?

Some investors who are interested in steel also want more diversified investment options. The SPDR S&P Metals & Mining ETF isn't a steel ETF, but it has a large allocation to the industry. About half of the fund's assets are invested in steel producers, and another small portion of the fund holds shares of providers of key raw materials for steel production, including iron ore and metallurgical coal. Precious-metals miners make up about 20% of the fund, with aluminum and copper producers, coal miners, and diversified companies rounding out the portfolio. The entire commodity complex has gotten hurt lately, and so it's not surprising to see this fund underperform even the pure-play steel ETF.

Broader-based ETFs don't offer much steel exposure. Both the Vanguard Materials ETF and the Materials Select Sector SPDR include steel stocks, but they only make up 6% of the Vanguard fund's portfolio and 3% of the SPDR fund. Chemicals stocks are the main driver of these ETFs, and their relatively strong performance has led to dramatic outperformance over the past five years compared to what steel stocks have endured.

What's ahead for steel?

One major question for steel stocks is whether protectionist measures will end up helping U.S. steel producers. Allegations of dumping of foreign steel on U.S. markets have led to an investigation from the federal government, and some investors hope that tariffs or import limits could help make U.S. producers more profitable.

In the long run, though, what matters most for steel stocks is an improvement in the supply and demand equation. Efforts to get spending measures passed in Washington have shown no success thus far, and many investors are starting to lose faith that hoped-for measures will become law. Without that upward impetus, it's entirely possible that steel stocks will give up their recent gains and move back down.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.