How to trade iron ore in the absence of a dedicated ETF

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The absence of a dedicated iron ore ETF has caused commodity-oriented traders some consternation when iron prices are soaring, and relief in the opposite scenario. But those looking for a way to trade the iron mining industry have a few more options.

[caption id="attachment_58837" align="alignright" width="300" caption="Substation 138 kV and blast furnace at ThyssenKrupp CSA steel mill, a JV between Vale and ThyssenKrupp"] Image courtesy Thyssenkrupp CSA/Vale [/caption]

Even though the Market Vectors Steel ETF ( SLX , quote ) nominally focuses on steel producers, it has still managed to accumulate a 23% allocation to Rio Tinto ( RIO , quote ) and Vale ( VALE , quote ), with both stocks getting roughly an equal weight in the portfolio.

This "iron and steel" approach seems intuitive and has definitely helped SLX manage its performance in periods when rising ore prices have sapped steel mills' profit margins.

Traders solely interested in steel may balk at having close to a quarter of their dedicated fund devoted to companies that prosper at the expense of iron consumers like Posco ( PKX , quote ) or ArcelorMittal ( MT , quote ), but that's a story for another day.

Those with absolutely no interest in the steel industry, on the other hand, will paradoxically get less iron than steel via the EGShares Emerging Markets Mining and Metals fund ( EMT , quote ), which offers 10.5% of its weight to VALE but has a mandate that prevents it from investing in Australian miners like RIO or BHP Billiton ( BHP , quote ).

Ironically, EMT is rich with gold, copper and even nickel, but more of its money is devoted to steel -- companies like Gerdau ( GGB , quote ), CSN ( SID , quote ) and Tata Steel -- than VALE.

Until an ETF company comes out with a dedicated iron ore portfolio that trades the physical commodity price, traders with iron on the brain may be best served by simply building a personal "fund" for themselves out of VALE, BHP and RIO.

It might not be glamorous or sophisticated to trade a three-stock basket, but it's likely that any ultra-specialized iron mining portfolio you could buy would be so overweight these three stocks that the results will be the same.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , International , Stocks

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