Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some metal and mining stocks to your portfolio but don't have the time or expertise to hand-pick a few, the SPDR S&P Metals and Mining ETF (NYSEMKT: XME ) could save you a lot of trouble. Instead of trying to figure out which metal and mining stocks will perform best, you can use this ETF to invest in lots of them simultaneously.
ETFs often sport lower expense ratios than their mutual fund cousins. This ETF, focused on metal and mining stocks, sports a relatively low expense ratio -- an annual fee -- of 0.35%.
This ETF has underperformed the world market over the past three and five years. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
Why Metal and Mining Stocks?
Our global economic slump is finally easing, and as the recovery heats up, construction and infrastructure projects get under way, and manufacturing kicks into a higher gear, demand for metals and minerals will increase. Thus, the situation is promising for metal and mining stocks.
More than a handful of metal and mining stocks had strong performances over the past year. AK Steel Holding (NYSE: AKS ) surged 41%. Some are hopeful for the company's prospects thanks to a recovering auto industry and price hikes. It has its fans on Wall Street, too, with Goldman Sachs recently waxing positive on the stock. Bears don't like AK Steel's pension and health care obligations to retirees, though, and worry that carmakers might decrease their demand for steel in favor of lighter carbon fiber. (The auto industry generates about half of AK Steel's revenue.)
Other metal and mining stocks didn't do quite as well over the last year, but could see their fortunes change in the coming years. Freeport McMoRan Copper & Gold (NYSE: FCX ) shed 3%, and yields about 3.5%. The world's largest publicly traded copper producer has been challenged by falling copper and gold prices, but while that can crush some metals companies, Freeport McMoRan Copper & Gold is exceptionally diversified, producing several metals; it is also very involved in the energy industry, due to recent purchases of oil and gas exploration and drilling companies. While some wait for better days, others see Freeport's stock as appealing.
Cliffs Natural Resources (NYSE: CLF ) sank 11%, struggling in a weak coal market. Its financial statements don't offer a lot to love lately, with free cash flow negative and debt substantial and growing. Meanwhile, Cliffs recently suspended development of its chromite mine in Ontario, and the stock is heavily shorted. Cliffs does sport a 2.3% dividend yield, but it's not a stranger to dividend cuts. Two bright spots are an uptick in demand from China and rising iron ore prices.
Walter Energy (NYSE: WLT ) plunged 52%. Walter Energy is a pure play in metallurgical ("met") coal, needed by the steel industry, and has fallen on hard times. For example, it slashed its dividend by 92% a few months ago to help it address its hefty debt. In its third quarter, met coal revenue rose 8%, while costs related to its production dropped 11%. That's promising, but total revenue was down 26% due to falling met coal prices, and operating losses were wider than expected -- though still far narrower than year-ago levels. Those who expect an uptick in demand for met coal might want to consider Walter Energy, but it's not likely to be very profitable in the near future.
The Big Picture
If you're interested in adding some metal and mining stocks to your portfolio, consider doing so via an ETF. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.