A Once-Hot ETF Now Looks Pricey

The VanEck Vectors Steel ETF SLX was one of the premier “Trump trades,” soaring last year as Donald Trump's protectionist campaign trail rhetoric sparked once moribund steel stocks.

Year-to-date, SLX is up 5.6 percent, but there are concerns Trump trades are waning. Regarding SLX, part of the issue is the expected delay in Trump's widely anticipated infrastructure initiative. On the campaign trail, Trump promised to spend $1 trillion to shore up America's roads, bridges and railways, but that plan has been pushed off to 2018.

Of added assistance to SLX has been political action in the United States.

In 2015, Congress took steps to protect U.S. steelmakers from the erosive effects of Chinese (and other) competitors flooding the market with cheap supply. Earlier this year, the U.S. Department of Commerce announced tariffs on steel imports to the U.S. so punitive that Chinese makers are essentially excluded from the market.

But after last year's surge, it looks like steel stocks are pricey.

“As Chinese demand for these commodities fades following the stimulus-led demand uptick in 2016, we expect significant downward pricing pressure on key industrial commodities such as aluminum, iron ore, met coal, thermal coal, and copper,” said Morningstar in a recent note.

The VanEck Vectors Coal ETF KOL was last year's best-performing non-leveraged exchange-traded funds for a simple reason: Of the two nominees for the U.S. presidency, one was vocal in her disdain for the coal industry while one vowed to restore the industry's lost jobs.

President Trump, obviously, was the candidate that promised to restore coal country's lost glory and KOL responded. The ETF is doing so again this year with a year-to-date gain of almost 18 percent. That means KOL has nearly doubled in value over the past year. Still, there are ample indications that Trump's promises to coal miners will be hard to keep.

“At the regional level, U.S. steel stocks have performed especially well in recent months, thanks to investor optimism stemming from a potential infrastructure spending boost and supply-side reform in China,” Morningstar said. “However, we believe the long-term impact of both factors will disappoint relative to the expectations that seem to be reflected by current share prices. We expect Chinese steel demand will soften as the benefits of stimulus measures fade. This will limit the global impact of supply-side reform in China and weigh heavily on steel prices.”

SLX allocates just under 39 percent of its weight to U.S. steel stocks. Brazil and the Netherlands combine for over 30 percent of the ETF's weight.