In 2013, iron had an overall good run compared to other base
metals as prices and demand remained relatively strong. Ramp up
in production by the major iron ore producers, increase in
exports from Australia, Brazil and India will lead to a glut in
iron supply in 2014. In case this excess supply is not matched by
adequate demand, it will expose the market to the risk of a
decline in prices.
The fate of iron ore prices now mainly hinges on Chinese
demand. A rebound in China's metal imports along with
improvement in global manufacturing will push iron ore prices
upward. Furthermore, iron ore prices will be supported by
increased demand from steel markets in India, Japan and South
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SPDR-SP MET&MIN (XME): ETF Research
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However, aluminum and copper did not enjoy a similar fate in
2013. As supply outpaced demand, aluminum prices slid downhill
and recorded the lowest in November. Until the market can work
its way out of the oversupply, aluminum producers will continue
to face the brunt in the form of low prices. Furthermore, input
costs are expected to pose challenges for the industry.
In the medium to long term, aluminum consumption is expected to
improve on a global basis driven by the automotive and packaging
industries. The automobile market is becoming increasingly
aluminum-intensive and the global push to improve fuel efficiency
in vehicles is expected to more than double the demand for
aluminum in the auto industry by 2025. (Read:
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For most part of 2013, oversupply and lack of demand kept copper
prices in check. The scenario will continue in 2014 with demand
and supply imbalances. Notwithstanding the current volatility in
prices, we have a long-term bullish stance on copper, supported
by its widespread use, limited supplies from existing mines and
the absence of significant new development projects. Prices will
be influenced by demand from China and emerging markets, economic
activity in the U.S. and other industrialized countries.
Thus, in the metals market on the whole, increased supply and
insufficient demand will continue to exert a downward pricing
pressure on commodities over the short term. However, growth in
the U.S. and an improving global macroeconomic scenario in tandem
will boost demand in the industry. The long-term story for the
industry remains intact as growth in the emerging markets,
particularly in China and India, will be a major driver of metals
ETFs to Tap the Sector
An ETF approach can help spread out assets among a variety of
companies and reduce company-specific risk at a very low cost.
There are currently two ETFs available to play this sector. (See
all Materials ETFs
SPDR S&P Metals & Mining (
Launched in Jun 2006, XME seeks to replicate the S&P Metals
and Mining Select Industry Index. The S&P Metals & Mining
Select Industry Index represents the metals and mining
sub-industry portion of the S&P Total Market Index. With AUM
of $589 million, XME is the largest and most popular fund in the
metals and mining space.
It has a trading volume of roughly 2.9 million shares a day,
suggesting little or no extra cost in the form of bid/ask
spreads. The ETF is a low-cost choice, charging a net
expense ratio of 35 basis points a year, while the dividend yield
is 1.36% currently.
The fund currently holds 40 stocks in its basket, with only
34.12% of assets in the top 10 holdings with weightage of around
3% each. From a commodities perspective, the product is heavily
weighted toward steel with 35% sector weightage, followed by
diversified metal and mining (20%), coal and consumable fuels
(16%), precious metals (11%), gold (10%), and aluminum (8%).
Among individual holdings, top stocks in the ETF include
AK Steel Holding Corporation
Allied Nevada Gold Corp.
(MCP) with asset allocation of 3.82%, 3.74% and 3.56%,
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iShares MSCI Global Metals & Mining Prdcrs (
The ETF seeks to match the price and yield performance of MSCI
ACWI Select Metals & Mining Producers Ex Gold & Silver
Investable Market Index. This index measures the equity
performance of companies in both developed and emerging markets
that are primarily involved in the extraction and production of
diversified metals, aluminum, steel and precious metals and
minerals, excluding gold and silver.
Launched in Jan 2012, the fund has so far attracted AUM of $134
million. It has a trading volume of roughly 19,483 shares a day.
The ETF is currently charging a net expense ratio of 39 basis
points a year, with a dividend yield of 3.58%.
The fund currently holds 240 stocks with 99.66% sector weightage
toward basic materials. The fund allocates nearly 52% of the
assets in the top 10 firms, which suggests that company-specific
risk is somewhat high, as the top 10 holdings dominate half of
Among individual holdings, top three stocks in the ETF include
BHP Billiton Limited
Rio Tinto plc
BHP Billiton plc
(BBL) and with asset allocation of 13.3%, 8.2% and 7.8%,
The fund is widely diversified across various countries, and UK
tops the list, holding 21.37% of the fund, followed by Australian
(19.76%) and American securities (14.35%). These three nations
make up for nearly 55% of the assets.
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