to some positive trends in the space.
Among the top reasons for this jump are the focus on higher beta names, and the risk-on atmosphere in the market. Additionally, thanks to a lack of QE tapering, markets are once again embracing commodity-linked investments, further adding to the bullish trend.
This combination of factors has moved the only steel ETF in the market, the Market Vectors Steel ETF (SLX), up significantly over the past three months. In fact, the fund has added more than 17% in the time period, and is now on the verge of posting positive numbers for the YTD time frame.
Can This Surge Continue?
Some might be worried that this run is becoming overextended, and that steel stocks are due for a drop. However, there have been some new catalysts in the space that could suggest a further run in the industry.
This is especially the case after the latest news from Goldman Sachs and their views on the industry. Two analysts at the investment giant boosted their rating on the sector from ‘Cautious’ to ‘Neutral’, and apparently this was enough to generate some optimism over the space (read Steel ETF Investing 101).
It also didn’t hurt that Goldman Sachs wrote that many of the risks appear to be priced in at this point, and that fundamentals are starting to look appealing. The firm also boosted their rating on three stocks in particular—US Steel (X), AK Steel (AKS), and Steel Dynamics (STLD)—leading to a share price surge in these names in Monday trading.
As the only steel ETF on the market, SLX was bound to be one of the biggest fund beneficiaries from the news. However, investors should note that SLX is heavy in material companies like Rio Tinto and Vale, as these account for nearly 25% of the total exposure combined.
Still, the fund does have X, STLD, and AKS—the three aforementioned upgraded companies—in its portfolio, though they don’t make up that sizable of an allocation. SLX does have a significant mid and small cap allocation (close to 50%), so you are definitely going to get some higher beta securities in this product.
Thanks to this, SLX added about 1.8% in Monday trading, immediately following the news. Volume was also elevated, as half a day of trading was enough to get the fund past its usual daily average (read Time to Bet on the Steel ETF).
Things are looking up for the steel industry, as a solid trend in the materials space is combining with a push towards higher beta stocks to boost this sector. And now with Goldman’s improved outlook, others might drift towards the industry too.
If that wasn’t enough, the steel-producers Industry—from a Zacks Industry Rank perspective—is also quite good, coming in under the top 30%. This suggests that the space is also looking great from an earnings estimate revision perspective, so now might be the time to consider a broad market steel play, such as with the Market Vectors’ Steel ETF, in order to benefit from this solid trend in the industry.
This article is brought to you courtesy of Eric Dutram.