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A Structural Analysis of XME’s Portfolio: Is It a Steel Play?

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XME’s portfolio

The SPDR S&P Metals & Mining ETF (XME) seeks to invest in US-based metals and mining companies. The ETF seeks to mimic returns of the S&P Metals and Mining Select Industry Index. In this part of the series, we’ll take a close look at XME’s portfolio. This would help us understand what really drives XME’s performance.

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Steel play?

The graph above shows XME’s portfolio as of April 21. As you can see, steel companies constitute more than half of XME’s portfolio. Currently, U.S. Steel Corporation (X), Schnitzer Steel (SCHN), and AK Steel (AKS) are XME’s top three steel holdings.

The fund also lists Cliffs Natural Resources (CLF) as a steel company. However, CLF is an iron ore producer. Nonetheless, iron ore companies’ fortunes are closely tied to the steel industry.

Previously, we’ve seen that XME has a higher exposure to small-cap securities by virtue of being a modified equal weight portfolio. However, the small-cap exposure has helped XME’s 2016 performance, as the best-performing steel companies have been in the small-cap space.

Precious metals

XME has significant exposure to gold and silver mining companies. As of April 21, gold and silver companies formed almost 20% of XME’s holdings.

Both gold and silver have delivered handsome returns this year, which has boosted XME’s performance. You can consider the SPDR Gold Shares ETF (GLD) to get an exposure to physical gold. Alternatively, you can leverage your investment by investing in gold miners. VanEck Vectors Gold Miners ETF (GDX) can give you a diversified exposure to gold mining companies. GDX has delivered 65% returns year-to-date as compared to GLD’s 16% returns.

Looking at other industrial metals, Freeport-McMoRan (FCX) and Alcoa (AA) are the only copper and aluminum producers, respectively, in XME’s portfolio. Although XME lists Kaiser Aluminum as an aluminum company, it is actually an aluminum fabricator.

Looking at XME’s portfolio composition, steel should be the key driver of its performance. In the next part of this series, we’ll do a quantitative analysis to discover whether this is the case.

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