In this article, let's take a look at SPDR S&P Metals and Mining (XME, Financial). An ETF is a special type of fund that invests in a portfolio of stocks or bonds. The aim is to mimic the performance of a specified index. They are traded in the secondary market at any time (market hours) and investors can sell short.The advantages of this investment vehicle is that they provide an efficient method of diversification because investors gain exposure to an index or a particular sector. Secondly, investors know the composition of the fund at all times. Moreover, as they are a passive managed fund, they have good operating expense ratios.
The XME ETF
This ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of an index derived from the metals and mining segment of a U.S. total market composite index. It seeks to track the performance of the S&P Metals & Mining Select Industry Index.
The top 10 holding represent 40.2% of total portfolio, and the list includes companies such as: Newmont Mining Corporation (NEM, Financial), Hecla Mining Company Common Stock (HL, Financial), Coeur Mining, Inc. Common Stock (CDE, Financial), Royal Gold, Inc. (RGLD, Financial), Compass Minerals Intl Inc (CMP, Financial), Alcoa Inc. (AA, Financial), Century Aluminum Company (CENX, Financial), Stillwater Mining Company (SWC, Financial), Cliffs Natural Resources Inc (CLF, Financial) and Allegheny Technologies (ATI, Financial).
In terms of industry allocation, the fund has the following structure: Mining (43.13%), iron and steel industry (33.83%), coal and consumable fuels (17.97%) and precious metals (4.96%).
As of March 4, the geographic focus is the U.S. (99.9%), which means that this fund invests in U.S. companies. Also, it invests practically all in stocks (99.9%) while cash and others have an insignificant participation. The fund's number of holdings is 35.
Value at Risk
Value at risk (VaR) is a probabilistic method of measuring the potential loss in portfolio value over a given time period and for a given distribution of historical returns. VaR is the dollar or percentage loss in portfolio value that will be equaled or exceeded only X percent of the time.
So there is an X probability that the loss in portfolio value will be equal to or greater than the VaR measure.
The analyst must select the X percent probability and the time period over which VaR will be measured. Generally, it is used a one-day period.
We can obtain from Bloomberg the calculation of this measure. Although there are various methods, now we are going to concentrate on the Monte Carlo Simulation. This method generates hundreds, thousands or even millions of possible outcomes from the distributions of inputs specified by the user.
We are now assuming you are a risk manager and calculate the daily 1% VaR. The VaR (1%) indicates that there is a 1% chance that on any given day, the portfolio will experience a loss of $11,370.755 or more. We could also say that there is a 99% chance that on any given day the portfolio will experience either a loss less than $11,370.355 or a gain.
The loss represents 3.1% of the portfolio value, then on any given day there is a 1% chance that the portfolio will experience a loss of 3.1% or greater, but there is a 99% chance that the loss will be less than 3.1% or a percentage gain greater than zero.
Final Comment
Although the fund has generated a total return of -11.21% in the last five years, -16.83% in the last three years and -31.32% in the last year, this ETF provides exposure to a future increasing demand, of course with some potential risk that we try to measure through the VaR calculus.
For investors looking at a fund with international exposure, iShares Global Materials (MXI) could be the option.
Disclosure: Omar Venerio holds no position in any stocks or funds mentioned.
