ETF leads investors on a wild ride as steel industry concerns grow

A credit crunch could lead to the end of steel industry consolidation. (RIO TINTO VIA REUTERS)

The stock market has offered investors some wild rides recently, but few have seen ups and downs as steep as those set by the Market Vectors Steel ETF.

The exchange-traded fund, which hit the market in October, was among the hottest and most talked-about ETFs in the first half of the year, as its shares produced a 42 percent return. It was promoted with monthly press releases highlighting returns of the fund's benchmark and with miniature, paperweight-size I-beams emblazoned with the fund's name and ticker symbol.

But the recent credit crunch, spurred by problems with subprime mortgages, has also led to worries that a wave of consolidation in the steel industry could end. That concern has knocked down prices of steel stocks, sending the Steel fund into a tailspin. The fund gave up nearly 18 percent of its value in just the past month.

The Market Vectors Steel fund is just one of a number of formerly top-performing ETFs to fall much harder than the broad market during the past few weeks, bearing out warnings that investors who chase new ETFs promising to be the latest and hottest investment ideas can quickly get burned.

Among the other funds that have given investors whiplash: iShares MSCI Brazil Index returned 31 percent in the first half, but is down 21 percent in the past month. And PowerShares Listed Private Equity fund gained 11 percent through early June but has fallen 9.8 percent in the last month.

Investors who bought the Steel fund at the beginning of the year are still well in the black -- the fund had gained about 26 percent year-to-date through Monday. However, others who jumped on the bandwagon in June or July, when returns were still strong, could have gotten a black eye. The fund is advised by Van Eck Associates Corp.

"Thirty days ago it looked great. It was moving along nicely," says Tom Lydon, a financial adviser who specializes in ETFs and was bullish on steel earlier this year. "Then the market started to correct. The biggest gainers always give back the most."

Sam Halpert, a senior analyst at Van Eck Associates, says that while steel stocks have been hit recently, in the long term it remains a "a good space.

"Steel companies have good balances sheets and there is good long-term demand" for steel, he says.

Exchange-traded funds resemble index mutual funds but trade on an exchange like stocks.

The Market Vectors Steel fund holds about 30 steel companies in the United States and abroad, including top holdings Rio Tinto PLC, Companhia Vale Do Rio Doce, and Arcelor Mittal.

The steel industry remains widely fragmented, compared with its suppliers and customers, with no single player large enough to hold sway over prices. However, over the past several years investors have been cheering a wave of industrywide mergers that has helped shore up the situation.

Deals and speculation about deals have helped keep shares of steel companies trading at attractive prices.

Shares of US Steel Corp., for one, got a bump late last year amid rumors the company would be bought by a group of Russian steel and iron-ore companies.

While that never came to pass, the speculation didn't die off. Now, with the recent credit crunch, analysts say future merger activity could dry up.

"In the last few weeks questions have been raised about whether consolidation in the industry may be petering out," says Charles Bradford, a steel analyst with Bradford Research Inc. "The run-up was very much a takeover story."

Adding to the woes has been relatively soft demand for steel as customers sell off inventory they built up in anticipation of price increases last year.

Ian Salisbury is a Dow Jones Newswires columnist. He can be reached at ian.salisbury@dowjones.com.