Month-over-month, most sector investments have provided investors with ample capital appreciation. Country ETFs with ties to technology, energy and infrastructure have all performed admirably.
Yet there are a variety of areas of weakness that cannot be disregarded as inconsequential. For instance, in my February commentary on underachievement in the transportation arena, I highlighted the concerns with the Dow Industrials Average hitting new highs at the same time that the DJ Transportation Average is heading in the opposite direction. And on my weekend podcast, I talked about the problematic history associated with small-caps severely lagging large-caps during a bull market run.
A third area of trouble directly challenges the current consensus that economies like the U.S. and Germany will continue to “improve.” Companies engaged in the discovery and development of raw materials, as well as the countries tied to mining, forestry and chemical production, are seeing their corresponding ETFs pull back sharply.
In examining the month-over-month performance of 10 ETFs with the strongest one-year positive correlations to Vanguard Materials (VAW), there has been a decidedly negative tone.
|Month-Over-Month Returns For ETFs With High POSITIVE Correlations To The Materials Sector|
|iShares South Africa (EZA)||0.99%|
|PowerShares Pure Fundamental Small Growth (PXSG)||0.58%|
|Market Vectors Hard Asset Producers (HAP)||0.32%|
|iShares Australia (EWA)||-0.68%|
|SPDR Select Sector Materials (XLB)||-1.82%|
|iShares Russell MicroCap (IWC)||-1.92%|
|iShares Global Materials (MXI)||-2.67%|
|iShares DJ Materials (IYM)||-3.51%|
|First Trust Global Copper (CU)||-4.51%|
|Market Vectors Steel (SLX)||-5.84%|
|S&P 500 SPDR Trust (SPY)||3.07%|
Perhaps a stock market correction isn’t imminent. Nevertheless, one of the least correlated exchange-traded investments to the materials sector is the iPath S&P 500 VIX Volatility Mid-Term Futures (VXZ). Not only is it 4.63% in the same month-over-month period, but VXZ is successfully mitigating “long” cyclical stock risk in portfolios. (Note: In my 2/8/2012 commentary, I explained the benefits of a temporary portfolio hedge with VXZ.)
More importantly, ETF investors who intend to ride out any volatility in 2012 will need to be cognizant of their diversification (or lack thereof). Many who may feel empowered by holding Australia (EWA) may not be aware of its monumental dependence on raw material demand from China. It follows that China’s announcement on Monday that it is targeting its slowest GDP growth since 2004 was bound to have an adverse impact on Australian equities.
Similarly, the smallest upstarts in iShares MicroCap (IWC) as well as the rapid-fire growers in PowerShares Small Growth (PXSG) also share high positive correlations with the materials segment. Performance here has also been lackluster. Again, one may need to revisit his/her holdings to make sure that one’s portfolio is not overexposed to the “accelerating” economic growth story.
Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.