In early March 2018, the Trump Administration announced plans to introduce a significant tariff on steel and aluminum imports to the United States in an attempt to strengthen the U.S. steel industry’s future prospects. (See also: Sell GE on Trump Tariff Headwinds: Deutsche Bank.)
The tariff, which reportedly came as a surprise to manufacturers, would be set at 25% for steel and 10% for aluminum, although certain countries may be exempt, Nasdaq.com reported. While the implications for the steel industry are many, there are also broader ways that this news might impact investors more generally.
Exchange-trade fund (ETF) investors may be able to parlay this announcement into a successful investment bid in the metals and mining sector. However, they will need to be cautious, as some steel ETFs include components which may be impacted negatively by the tariff alongside others which may see positive results. (See also: Sell GE on Trump Tariff Headwinds: Deutsche Bank.)
Steel Sector-Specific ETF
Upon hearing the news of the intended tariffs, many ETF investors may have immediately turned to the VanEck Vectors Steel ETF (SLX). SLX follows global companies in the steel industry, including a 37.2% tilt toward the U.S. market. However, it also includes 19.1% Brazil, 13.3% Netherlands, and 11.1% U.K.
The result is that SLX includes more international components than it does U.S. ones, so the Trump tariffs could actually hinder SLX performance in the future. Indeed, in the immediate aftermath of the announcement, SLX fell by 1.0%.
Broader Metals and Mining May Be Key
XME includes a significant steel component, with 49.7% tilted toward steel producers. It also includes 14.1% coal and consumable fuels, 12.0% aluminum, 9.0% gold, 6.3% silver, and 5.1% copper.
XME is intended to track the performance of the larger S&P Metals & Mining Select Industry Index, an index centered on the related segments of the S&P Total Market Index. XME is designed with a relatively equal weight approach, as opposed to traditional cap-weighted indexing systems.
When the tariff news broke, it may have been tempting to rush toward an ETF product linked with steel. However, it’s crucial that investors know exactly what comprises the ETF they’re considering before making an investment decision. In this case, due diligence was key; it reveals that SLX might be negatively, rather than positively, impacted by the tariffs.
The underlying holdings of an ETF, as well as that product's indexing methodology, could make all the difference in the soundness of that product depending upon the situation at hand. In this sense, the diversification and broad exposure that ETFs offer can be either a beneficial or a detrimental factor in determining investment success, depending on how the components of the ETF itself are affected by the impending tariff.
For these reasons, a decision between SLX and XME may ultimately point investors toward the latter, even though it is only about half comprised of U.S. steel. For the time being, there are no other targeted alternatives available.
Some Countries May Be Exempt
News of the tariffs is ongoing, and it remains to be seen how and when the tariffs will be implemented. It is also possible that the tariff plan may shift considerably in the days and weeks to come. As is typical, however, the markets reacted immediately upon the first bit of news.
As of this writing, there is no definitive timeline as to the implementation of the tariffs, although it has been suggested that Canada and Mexico may be exempt. The EU and Japan have also been lobbying the Trump administration for exemptions. If certain countries are exempt, this could have an effect on the performance of the basket of steel-related components in one of these ETFs, depending upon the origin and business dealings of component companies.