ETF Talk: Investing with the Strength of Steel

As we usher in a new year, the economy is projected to improve from the doldrums of 2009. One way to ride the expected economic turnaround this year is to invest in steel. Savvy investors can invest in steel by buying the Market Vectors Steel ETF (SLX). This exchange-traded fund (ETF) has been climbing since last spring and should gain further momentum from rising demand. An ETF also offers diversification by investing in a basket of companies in the steel industry, not just one that could melt down unexpectedly.

J.P. Morgan appears to be taking notice of steel’s improved outlook. The investment firm recently raised its price targets on three of the industry’s major companies, U.S. Steel (X), AK Steel (AKS) and Arcelor Mittal (MT). The report also mentioned that scrap prices have rebounded by roughly 25% since their mid-November lows and could rise by another 15% due to seasonal supply constraints, strong exports, and low inventory levels at the mills. This data is significant because the price of scrap metal is an economic indicator. When the price of scrap metal rises, the economy typically is on the upswing.

A big reason for the increased demand in steel is the voracious appetite for the metal that is coming from China. The Chinese economy has been growing quickly in recent years, while many other economies around the world have been languishing. China’s surging demand for steel is gaining widened attention.

“Already the world’s largest producer by far, the country is expected to rev up production by nearly 10%, The Wall Street Journal reported Jan. 11. “But the higher output likely won’t exceed demand, pushing prices higher world-wide for steel, its raw materials and even coal.”

Steelmakers that temporarily closed a number of mills and cut production as economic conditions sagged last year now are boosting production to address the increased demand. Resurgence in the steel industry is lifting the share prices of the public companies that produce steel. The following chart shows the dramatic improvement in the fortunes of the steel industry ETF, SLX.

As you can see, SLX has been trending upward since last March. However, the ETF has shown occasional weakness during its rise. Such dips present good buying opportunities. With the market at large and, steel companies in particular, taking minor hits from investors during the past couple of trading days, those of you interested in buying SLX may be tempted to do so soon.

If you want advice from me about which ETFs to buy and to sell, I encourage you to sign up for my ETF Trader service by clicking here. As always, I am pleased to answer any of your questions about ETFs, so do not hesitate to contact me if you have one. To send your question to me, simply click here. You may just see your question answered in a future ETF Talk.