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The Best Way to Invest in the Red-Hot Metals Sector |
Published:
November 1,
2007
The
SPDR S&P Metals & Mining ETF (AMEX: XME, $66.31) is a
play on hard assets like precious metals (gold), industrial
metals (copper, aluminum), steel, and coal. According to studies
conducted by research firm Ibbotson, this group has a very low
correlation with other traditional asset classes, and a modest
stake can boost long-term returns with negligible additional
risk -- and that has certainly been the case lately.
The fund mirrors the performance of the S&P Metals & Mining
Select Industry Index. Over the past five years, the index has
delivered sizzling annual returns of +29.8% -- and since
inception, XME has done a good job of tracking this benchmark.
The fund's portfolio is relatively concentrated and only
contains about 25 names. And at roughly 45% of assets, the
biggest portfolio concentration is in the steel sector, which
continues to enjoy a tremendous rally amid unprecedented global
demand from China and other emerging markets. For example, the
fund has cashed in gains on Nucor (NYSE: NUE), whose profits
have soared from $62 million to $1.7 billion over the past three
years. AK Steel (NYSE: AKS), whose shares have soared over
+200% so far this year, has been another big portfolio winner.
All told, XME has delivered impressive gains of +45% over the
past 12 months -- ahead of about 90% of its rivals in the
natural resources category. There have been several factors
behind the run-up in many portfolio holdings, including industry
consolidation. The falling dollar has also played a role. Many
commodities are denominated in U.S. dollars, so a weaker dollar
makes them more attractive to foreign investors -- further
pushing up their prices.
Clearly, XME has been in the right place at the right time, and
investors shouldn't grow accustomed to red-hot annual gains of
nearly +50%.
Nevertheless, while day-to-day returns are likely to be volatile
given the cyclical nature of many commodity prices (as well as
the fund's narrow focus), we think long-term shareholders will
ultimately be rewarded for their patience. After all, to a
certain extent this fund is a play on the continued economic
expansion that is taking place throughout the world's emerging
markets. Construction requires large amounts of steel, copper,
and other basic building materials, and there is a finite supply
of these resources to go around.
Still, given the risks, the fund is best left to aggressive
investors and even then in limited doses. That being said, we do
think investing in hard assets can be an integral component of a
well-rounded portfolio, and XME is an ideal way to gain exposure
to this sector.Good investing!
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Nathan Slaughter
Editor
The ETF Authority, Half-Priced Stocks
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