This Mining ETF Is Trying To Mount A Comeback

Shares of non-precious metals miners have continued slumping this year as highlighted by the performances of exchange-traded funds dedicated to coal producers and steelmakers.

However, the SPDR S&P Metals and Mining (ETF) (NYSE:XME) has recently been perking up, rising more than 2 percent over the past month. That might not sound like much, but consider this: The $259 million XME is down 40.5 percent this year and more than 47 percent over the past year.

XME Headwinds

Slack global economic growth forecasts and flooding of the market with cheap steel by foreign producers are among the headwinds XME and its 30 holdings have had to deal with in recent years. Slumping steelmakers are a significant problem for XME, as the ETF devotes 48 percent of its weight to that group.

That makes steel producers XME's larges industry weight at nearly quadruple the weight assigned to diversified miners, the ETF's second-largest sector exposure.

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An appreciating U.S. dollar, excess global capacity due to weaker demand in China and the influx of cheap imports has negatively impacted U.S. domestic steel producers market share and margins due to the extreme price competition, said S&P Capital IQ in a note out Monday.

However, S&P Capital IQ equity analyst Matthew Miller believes the worst is over for steel producers and we see upcoming catalysts from pending trade case determinations. He thinks that imports will revert back down to historical levels, allowing steel producers to benefit from a gradually improving construction market, impressive automobile demand, and an aerospace industry poised to experience a long-term secular uptrend.

XME Allocations

XME features four steelmakers among its top 10 holdings, including Nucor Corporation (NYSE:NUE), which accounts for 4.4 percent of the ETF's weight. S&P Capital IQ has a Strong Buy rating on Nucor, the largest U.S. steelmaker.

According to Miller, NUE's strategy to become more vertically integrated with its new Louisiana direct reduced iron plant will result in generally less volatile production costs. The new plant will enhance NUE's low-cost position in the U.S. steel industry.

For the longer term, he sees earnings rising on U.S. economic growth, strong automotive demand, and a recovery in U.S. nonresidential steel demand and better control of raw material costs. In 2016, S&P Capital IQ forecasts $3.18 in 2016, up from $1.67 in 2015, driven in part by 8 percent revenue growth, said the research firm.

XME's Catalysts

XME has also recently been boosted by the resurgence of precious metals miners, as the ETF allocates a combined 23.2 percent of its weight to precious metals miners. Up nearly 13 percent over the past month, the Market Vectors Gold Miners ETF (NYSE:GDX), the largest gold miners ETF, is among the leaders of the precious metal miners ETF comeback.

GDX has $5 billion in assets and it trades on average 63 million shares on a daily basis with a $0.01 bid/ask spread, said S&P Capital IQ.

GDX is top heavy, as its top 10 holdings combine for over half the ETF's weight.

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