The core motivation for investing in steel is capturing the global macro infrastructure theme. Currently there is huge global investment in new infrastructure and industrialization. All of that growth needs steel. If this is your motivation for investing in steel, then it makes sense to think about certain factors related to industrial metals investing:
- The base metals sector is very cyclical. The fact that we are several years into several different bull markets masks that. If economic growth or public investment were to slow down, steel makers would feel it.
- The biggest foreign markets for steel (think BRIC), also have the most state involvement in the sector.
- Basic steel is a commodity industry and very competitive. This increases volatility.
- If people need steel, then they need other base metals as well. Unlike precious metals, steel is not consumed all by itself.
It is in that last point where I don't see the steel ETF (SLX) being better than the SPDR Metal and Mining (XME) for most investors. If people need steel, they will need other base metals as well. Most goods that require steel also need copper wiring and other performance metals/alloys. Owning the full base metals complex gives XME internal diversification that SLX lacks. XME has a slightly lower expense ratio as well.
Unless you have a specific reason for investing in steel rather than base metals; XME is probably a better way to capture any steel related market action.