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Portfolio > ETFs

Portfolio Fix: Using Mining ETFs as a Commodity Play

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In the two years since the stock market sank to a dozen-year low in March 2009, the prices for many types of metal – precious and industrial – skyrocketed.

Copper, often considered to be the most economically sensitive metal due to its use in housing and appliances, began to rally two months before the stock market finally hit bottom, even though exchange inventories were still rising.

Investors now have a wide range of funds to choose from that offer exposure to precious and industrial metals, including both commodity funds that own physical metal and equity funds that own shares in metal producers.

With prices for copper, gold, and silver at or very near all-time highs, and a strengthening global economy promising to boost demand for those and other metals, it may make sense to look at ETFs that will benefit from this environment in the year ahead, especially for risk-tolerant investors and those with little or no exposure to commodities. Metals and other commodities also provide a measure of protection against inflation.

The rise in metals prices is now flowing through to earnings for metals producers.

Standard & Poor’s Equity Analyst Leo Larkin sees gold and copper producers posting the strongest earnings-per-share gains for the first three months of 2011, mostly because of higher metals prices.

He has buy recommendations on three gold stocks: Newmont Mining (NEM), Barrick Gold (ABX), and Randgold Resources (GOLD). Aluminum producers will also likely show gains, and Larkin has a buy recommendation on Alcoa (AA).

“Steel will lag the other groups because pricing is not as robust and they will be more prone to a margin squeeze due to more rising raw materials costs,” Larkin says.

Leaving aside pure commodity funds, there are currently about 25 ETFs that invest in the producers of such metals as gold, silver, platinum, uranium, lithium, copper, aluminum, steel, and rare earths/strategic metals.

The oldest and largest of these funds is the $7 billion Market Vectors Gold Miners ETF (GDX), which was launched on May 16, 2006.

More recently, five new funds launched over the past year.

For the group as a whole, performance over the 12 months to March 1, 2011 ranged from a 71% jump for the Market Vectors Junior Gold Miners ETF (GDXJ) to a 13% gain for the PowerShares Global Steel Portfolio (PSTL).

S&P’s quantitative methodology for evaluating ETFS uses nine different metrics relating to performance, cost, and risk. Just two ETFs have an “Overweight” recommendation on a performance basis, which incorporates STARS recommendations from S&P equity analysts, S&P’s Fair Value ranking, as well as a technical/chart-based indicator.

One of those funds is the Emerging Global Shares DJ Emerging Market Metals & Mining Titans Index ETF (EMT), which invests in the largest miners of copper, nickel, platinum, palladium, iron ore and coal in the emerging markets. 

Since it opened in May 2009, the ETF gathered about $33 million in assets and its shares have risen by about 20.4%.

Its top 10 holdings, as of year-end 2010, included S&P buy-ranked Brazil Vale (VALE), the second-largest mining company globally, as well as Sterlite Industries (SLT) – the largest non-ferrous metals and mining company in India, and China Shenhua Energy (01088 Hong Kong), the leading integrated coal producer in China.

Last last year, about 27% of its holdings were diversified metals and mining companies, 23% were steel companies, and 22% gold or precious metals companies.

The other ETF that earns an “Overweight” rank in the performance category is the Market Vectors Steel ETF (SLX), which opened in October 2006 and has about $300 million in assets.

The ETF invests in global steel makers and iron ore producers, and has returned an average of 15.4% annually since it launched. Among its top 10 holdings, which account for about 70% of the fund’s assets, are Vale, as well as S&P strong buy-ranked diversified miner Rio Tinto (RIO), and S&P buy-ranked Cliffs Natural Resources (CLF), the largest producer of iron ore pellets in North America.

About 40% of the ETF’s assets are held in companies based in North America, 31% in Europe, 23% in South America, and 6% in Asia.

One metal producer ETF that has enjoyed remarkable success since its recent launch is the Market Vectors Rare Earth/Strategic Metals ETF (REMX), which opened for trading in October 2010 and has collected more than $420 million in assets since then.

Just a month before its launch, rare earths – a collection of 17 different minor elements needed to produce many types of technologically advanced equipment – were thrust onto the front pages when China reportedly halted shipments of rare earths to Japan following a dispute over a detained fishing boat.

China produces about 95% of the world’s rare earths supply, and the move – which China officially denied – sent manufacturers scrambling to find substitutes for rare earths or alternate sources of supply.

The ETF owns shares in 26 different companies mostly based in Australia and Canada. Its largest holding as of February 28, 2011, was Lynas (LYC Australia), which is building a rare earth processing plant in western Australia that it expects will begin operations later this year.



S&P Senior Editorial Manager Vaughan Scully can be reached at [email protected]. Send him your ideas for mutual fund and ETF stories.


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