Tough Year For Basic Materials ETFs

Includes: FXZ, IYM, VAW, XLB
by: John Spence

It has been a frustrating 2011 for exchange traded funds that invest in materials stocks, which have been hurt by Europe’s relentless debt crisis and questions over the global economic recovery.

Materials Select Sector SPDR (NYSEARCA:XLB) is down about 14% year to date. Other ETFs for this sector include iShares DJ US Basic Materials (NYSEARCA:IYM), Vanguard Materials (NYSEARCA:VAW) and First Trust Materials AlphaDEX (NYSEARCA:FXZ).

“Strong infrastructure and construction spending in China have supported rallies in commodity prices in the past few years,” Morningstar analysts wrote in a profile of Materials Select Sector SPDR.

“Most materials firms produce commodity products and operate in a highly cyclical industry. Aside from cyclicality issues, many firms in this fund have to deal with volatile raw material and energy prices, (and) high fixed costs,” according to the report.

“During 2011 the materials sector has underperformed,” said Investors Intelligence technical analyst Tarquin Coe, pointing to the decline in Materials Select Sector SPDR.

“A declining trend channel is evident since the start of the year. That road leads back down to the 2010 low of $27.67 (a share),” he said in a newsletter. “That would be the third test of that level and should it fail to provide support a two year head-and-shoulders top would be activated. The bearish pattern has a target back down to the lows of 2009.”

The materials ETF’s top holdings are DuPont (NYSE:DD), Monsanto (NYSE:MON) and Freeport McMoRan (NYSE:FCX).

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