S&P Likes Materials ETFs On Emerging Market Demand

Includes: IYM, VAW, XLB, XME
by: Tom Lydon

Signs of a gradual recovery in the materials sector of the S&P 500 has hinged upon a slow economic recovery in the U.S. and China. Exchange traded funds tracking this sector are an affordable, risk-adjusted method of gaining exposure to these equities.

S&P Capital IQ lifted its view on the Materials sector of the S&P 500 Index from a negative stance to a neutral one, citing an expected recovery in global economics in 2013.

"Furthermore, the growing demand from emerging markets for metals and mining products should drive the increase. One way to gain exposure to this space is through ETFs, which can provide diversification in ways where individual equities fall short," S&P said in a recent note.

S&P Capital is positive on the diversified chemicals firms, which can be accessed through the iShares Dow Jones U.S. Basic Materials Sector Index Fund (NYSEARCA:IYM). The research firm has upgraded this ETF to Marketweight, along with the Vanguard Materials Index Fund (NYSEARCA:VAW). IYM gives the top holdings to chemical companies, while VAW gives 19.3% to chemical companies. VAW is the least expensive ETF with an expense ratio of 0.14%.

"Fundamentals for diversified chemicals, the largest sub-industry in the sector, are positive, according the S&P Capital IQ equity analysts. We think the decline in U.S. natural gas prices relative to global crude oil prices has improved the feedstock cost competitiveness of the U.S. petrochemical industry versus other global regions, such as Europe, thus helping boost U.S. industry exports," said S&P Capital IQ.

Metals and mining is another sub-industry area that S&P Capital is bullish on. Analysts have a positive fundamental outlook for the next 12 months as sales and earnings are expected to recover from the depressed lows of last year. The SPDR S&P Metals and Mining ETF (NYSEARCA:XME) and the Materials Select Sector SPDR (NYSEARCA:XLB) are in focus as materials such as nickel, copper, aluminum and iron ore are expected to rise on higher demand.

iShares Dow Jones U.S. Basic Materials Sector Index Fund

Tisha Guerrero contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.