Wall Street has new reason to pour capital into metals and mining stocks – particularly US-based steel and aluminum producers. There are also multiple ways for US steel producers to benefit from what comes next – regardless of whether protectionist fears hurt other industries.
The easiest way to gain exposure to US-based steel producers is through XME, the SPDR Metals and Mining ETF.
In December, we highlighted XME as a smart way to play the metals. Thanks to strong price performance and favorable news developments, it’s worth revisiting XME once again.
XME is dominated by steel stocks, which represent more than 48% of the ETF (as you can see by the weightings below). Coal and consumable fuels have the second largest weighting. Aluminum is a close third.
The steel and aluminum component of XME – which is geared toward US-based metals producers – is highly relevant because of recent developments in Washington.
As you may have heard, there are new US tariffs in the works on steel and aluminum produced outside the United States. These tariffs run as high as 25% and have provoked strong negative reactions from America’s trading partners.
As a result, there are rising fears of protectionist backlash and a potential trade war. Europe, China, and other countries are threatening retaliatory measures against various US industries.
But some groups are pleased by the tariffs, arguing that it’s well past time the United States took measures to protect vulnerable areas of its economy.
Without getting into policy debate, it’s clear that Wall Street sees these tariffs as favorable for US steel producers. This in turn is lending strength to XME, which is oriented to that same group.
The relative performance of XME is strong, as visible in the chart below. In terms of internal components, more than 70% of the stocks that compose XME are in the green zone. This is the sign of a healthy ETF with capital flowing in.
Our proprietary time-cycles analysis also favors XME. As we observed in December, XME “could continue rising through the first 8-10 months of 2018.” That analysis still holds true.
Newly positive sentiment toward XME (because of the tariffs favoring US steel producers) further favors that outcome.
There is another reason to take a bullish stance toward XME. Capital flows could be favorable for this ETF whether or not trade war retaliation hurts other US industries.
As briefly explained, there are two sides to the policy debate on tariffs. One side argues these tariffs will hurt the US economy (via protectionist backlash – with the possibility of full blown trade war – and higher prices for end-users of steel and aluminum like Ford, Caterpillar, and Boeing – not to mention countless small manufacturers).
The other side argues the US economy is strong enough to withstand turbulence… that protectionist fears are overblown… and that a slight rise in metals prices is worth the benefit of protecting American industry.
Again, without taking sides, it’s notable that metals and mining stocks could do well in either of these scenarios.
If other industries or sectors are hurt, or if Wall Street sees them as less favorable, more capital could flow into XME as a haven for investors. If the US economy continues to perform, on the other hand, metals and mining stocks could continue rising along with the broad market.
A few months ago we said XME was “a smart way to play the metals.”
That looks even more true today…
Richard Smith, PhD
CEO & Founder, TradeStops