Earlier this week, the U.S. quietly lifted its steel and aluminum tariffs on Mexico and Canada. The tariffs, which had levied a 25% tax on steel imports into the U.S. and a 10% tax on aluminum imports, have been in place for nearly a year, after trade talks between the U.S., Mexico and Canada had stalled.
Easing these tariffs will likely smooth the process toward ratifying the USMCA trade deal, a three-nation pact designed to replace NAFTA. But it doesn't seem to have done much good for the $59 million VanEck Vectors Steel ETF (SLX), which has been on a downward slide since April. In the week since the tariffs were lifted, SLX has dropped 3%:
Source: StockCharts.com. Data as of May 23, 2019.
US Steel Companies Benefit From Tariffs
SLX's price decline over the past week likely stems from the fact that U.S. steel companies actually benefited from the tariffs, which discouraged domestic consumers of steel from purchasing foreign metal.
In fact, U.S. steel companies were vocal supporters of the tariffs, praising them as relief from foreign competition, particularly from Chinese producers selling below cost (read: "Tariffs Lift Steel & Aluminum ETFs").
Though USMCA has protections in place against "dumping" of below-cost steel from foreign countries into the U.S. economy, increased competition will likely weigh on domestic steel companies.
To some extent, however, SLX has been shielded from too much headline risk, given that the ETF is global in nature, with only 37% of its portfolio dedicated to U.S. companies.
Instead, the decline in U.S. steel stocks is offset in the portfolio by gains from foreign producers, such as those in Brazil, which comprises 20% of the portfolio; Netherlands, which comprises 14%; and Australia, which comprises 13%.
No Exposure To Chinese Steel Cos.
Intriguingly, SLX has no exposure to Chinese steel producers, such as Baowu Steel, a state-owned enterprise and the world's second-largest steel producer, or Hesteel, the world's fourth-largest producer.
That's likely because SLX's benchmark index, the NYSE Arca Steel Index, only pulls from stocks and ADRs listed on the NYSE and Nasdaq exchanges. Many Chinese firms list only in Shenzhen or Shanghai.
It's unclear why SLX uses the NYSE Arca Steel Index, and not an in-house Market Vectors brand index, like its sister fund, the VanEck Vectors Coal ETF (KOL). In 2012, VanEck rolled out its own proprietary steel index, the Market Vectors Global Steel Index, which includes Chinese companies. Yet SLX never switched over.
Not including Chinese firms hampers SLX's ability to capture the true scope of the global steel market. Further muddying the waters is the fact that the ETF includes companies that service and supply steel producers as well. So as far as market representation goes, SLX isn't exactly great.
‘XME’ An Imperfect Alternative
Still, SLX is the only game in town for ETF investors seeking pure-play exposure to steel equities. The closest alternative is the $400 million SPDR S&P Metals & Mining ETF (XME), which tracks an equal-weighted index of U.S. metals and mining companies. Steel companies represent 52% of XME's portfolio.
SLX has an expense ratio of 0.56%.
Contact Lara Crigger at [email protected]