Strong Steel Sector Boosts a Van Eck ETF; Fund Delivers Big Return Amid Industry's Profits, Expected M&A Activity

John Spence. Wall Street Journal. (Eastern edition). New York, N.Y.: May 1, 2007. pg. C.11

(c) 2007 Dow Jones & Company, Inc. Reproduced with permission of copyright owner. Further reproduction or distribution is prohibited without permission.

Higher profits at steel companies and expected merger-and- acquisition activity has helped a small and little-known exchange- traded fund deliver some of the year's best returns for the group.

The $70 million Van Eck Market Vectors Steel ETF was up 29.2% this year as of Friday, trailing only SPDR S&P Metals and Mining among exchange-traded funds, according to investment researcher Morningstar Inc.

The Van Eck ETF came to market in October and follows the Amex Steel Index, which is made up of 36 U.S.-listed stocks and American depositary receipts of foreign companies, according to Van Eck Global. Top holdings include Brazilian mining firm Companhia Vale do Rio Doce, Anglo-Australian Rio Tinto PLC, Arcelor Mittal and Posco.

The fund, which has an expense ratio of 0.55%, should be quite volatile given the cyclical industry it tracks and the relatively few number of holdings. Yet the ETF's components have soared over the past few years on higher steel prices, which did pull back during the second half of 2006 and bottomed in this year's first quarter.

In addition to the M&A theme, steel stocks have benefited from increasing demand for basic materials from emerging markets such as China, which are developing their infrastructures. Steel producers have also become more adept at negotiating labor-related issues and improving their cost structures after difficult times, analysts say.

Some analysts contend that big transactions, such as U.S. Steel Corp.'s $2.1 billion acquisition of oil-field-piping specialist Lone Star Technologies Inc., reduce the number of players and should help stabilize prices and production. Ipsco Inc., a maker of steel plate and energy tubular products, recently said it is engaged in discussions that could lead to a potential acquisition of the company.

"As the sector becomes more concentrated, we believe industry discipline will become more institutionalized, which may ultimately lead to higher multiples," wrote Bear Stearns analysts in a recent research note. "It is also possible that given the dwindling number of companies in the sector, investors may be willing to pay a higher multiple for the equities, given their scarcity factor," they added.

As a result, steel stocks have recently attracted the interest of momentum investors and those betting on more M&A activity. "This used to be seen as an ugly space to be in, but now it's sexy," said UBS analyst Timna Tanners, who added that investors are willing to pay more on a multiple basis for the same earnings.

Fund Directors: More Pay,

But Also More Work

Mutual-fund directors earned 15.5% more in 2006, their fifth consecutive year of double-digit pay increases, according to Management Practice, a consulting firm that specializes in advice to fund boards.

Among the largest fund companies when measured by assets, annual median compensation for fund directors was $171,775 in 2006. In the survey for 2005, median annual compensation at the largest fund families was $147,000.

The increase in pay comes as more focus is being paid to the job that directors do in looking out for the shareholders that they serve, the report said. "The need for specialized, knowledge-specific fund directors has driven overall compensation to record levels," the report said.

Still, the report said, the overall cost to shareholders remained low. The average cost to shareholders was $15.40 a year per $1 million in assets. In the 2005, that cost per $1 million was $16.10. The survey of 1,967 directors at 337 fund families found that 81% of directors are independent. The survey also found that the chairman of the board was independent 60% of the time, up from 50% last year, even as the Securities and Exchange Commission continues to struggle with whether it should mandate an independent chairman.

-- Tom Lauricella