Portfolio Fix: Rising Metals Prices Bring New Shine to Mining ETFs

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.

As of that date, 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 that are 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.