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ETF Specialist

Steel ETFs: Investing in an Out-of-Favor Sector

This cyclical sector appears undervalued, but be ready for a bumpy ride.

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Exchange-traded funds are great complements to or substitutes for mutual funds, but they are also effective vehicles for speculating on secular trends in the equity markets. Morningstar's ETF Screener can be a great place for investors to hunt for ETFs that are undervalued. Because Morningstar has nearly 80 equity analysts following and valuing about 1,600 stocks that trade in the United States, we are able to value many ETFs when our analysts cover a sufficient number of ETFs' underlying holdings. Morningstar's equity analysts compute their estimates of intrinsic values of all of the companies that they cover, and then we aggregate and weight those values to calculate the fair value of an equity ETF. Equity sector and thematic ETFs' price/fair-value discount can be a good measure for investors looking to locate an undervalued ETF.

Right now, Morningstar's ETF Screener shows that one of the most attractively priced funds for which we have an estimate of fair value is  Market Vectors Steel ETF (SLX), which is the largest ETF geared toward the steel industry. At a price/fair value of 83%, SLX trades at the deepest discount of any equity sector ETF outside of the distressed financial sector.

Robert Goldsborough does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.