Market Participant (MP) doesn’t post very often, but when he does, it is worth reading.
In this post, MP says he has been looking at SPDR Metals and Mining (XME). “This ETF represents an equal weighted index of stocks involved in metals and mining. The fund is mostly base metals miners, together with a few steel makers, coal miners and gold miners.” MP presents a chart comparing XME to GDX and IGE, which shows that XME has declined quite a bit more, on a percentage basis, than the other two in the last 3 months. In view of the steep decline of gold, I found that surprising.
MP continues, “The main question about investing in XME is the relationship between energy prices and demand for metals. Fundamentally lower energy prices make it cheaper to refine metals while freeing up income to be spent on metal and metal objects. It seems that this point has been forgotten during the current Natural Resources relaxation. If core energy prices go down, mining and refining metals is more profitable.
The core arguments for a secular bull market in natural resources remain in place because the faster growing parts of the world (EEB) are slowly converting from export to consumption driven economies. Over time consumers throughout the developing world will demand more metal intensive consumer goods (think of cars, refrigerators, air conditioners etc). Natural resources have been a hot investment theme for the past few years. But all natural resources are not alike.”
Comparing XME to GDX, which I have been studying, XME offers a higher current yield, a lower expense ratio, probably less volatility (none of these have been around long enough for reliable betas or standard deviation to be calculated), and XME also offers broad diversification among steel, copper, titanium, aluminum, silver, gold, and coal producing companies, while GDX is concentrated in the gold mining industry.
According to etfconnect.com, the current distribution rate is .91% and the expense ratio is .35. The portfolio is 100% domestic, consisting of 78% materials, 21% energy (coal). The top 10 holdings as of 8/31/2006:
Holding % of Total Portfolio
Nucor Corp 3.83
Newmont Mining Corp 3.78
Phelps Dodge Corp 3.77
Titanium Metals Corp 3.74
Alcoa Inc 3.74
Consol Energy Inc N/A 3.72
Freeport-Mcmoran Copper & Gold 3.72
Allegheny Technologies Inc 3.68
United States Stl Corp New 3.64
Peabody Energy Corp 3.57
I rather like this portfolio. Many of these stocks have been appearing on value screens. Looking at a relative strength chart, it is apparent that XME is beginning to gain on GDX. I am adding XME to my watchlist. Like GDX, if purchased well on a show of technical strength, it would offer a hedge against inflation and all kinds of disasters; but it also offers participation in the theme of increasing consumption of consumer goods by developing countries in the future. This would make a great replacement for some of the portfolio clutter I’ve been selling lately.