Last week’s breakout was encouraging to investors. After averting another sudden downtrend in mid-July, the larger uptrend appears to be in place for now. Bloomberg reported recently, though US economy shrank in the first three months of 2009, the recession may be bottoming. According to the median forecast of 66 economists surveyed by Bloomberg, the economy could be rising before our eyes.
Still, the US economy is dependent on US consumers. Consumer spending still accounts for 70% of the economy. With unemployment still rising and house values continuing to decline, it may not be best to go ‘all-in’ quite yet. That’s why we’re looking at one area not directly tied to consumers: Materials.
The materials sector is closely tied to commodities. As commodities rise, materials stocks often move in tandem. If the US economy is stabilizing, we see some healthy potential for materials. For one, it was one of the hardest hit sectors in the global slowdown. It stands to gain the most in a global recovery. Second, of the 9 S&P sector SPDRS, it has risen the most in the past month. Third, commodities will be needed as the global economy recovers. There are a few ways to capitalize on Materials rising.
Materials Select Sector SPDR (XLB) is the traditional materials ETF. Comprised of US-based stocks, XLB holds companies like Monsanto (MON), DuPont (DD), and Newmont Mining (NEM). Like many ETFs, XLB closed above the 6/12 high on Friday. We expect this momentum to continue in the near future. If you’re looking to profit in US-materials, XLB is the way to do it.
Vanguard Materials ETF (VAW) is the low-cost way to get US-materials exposure. With a total expense ratio of 0.2%, it’s about a quarter of the size of XLB in total assets. VAW has a similar upward trajectory as it’s big brother, XLB. In addition to XLB’s main holdings, VAW holds Praxair (PX), Nucor (NUE), and Dow Chemical (DOW) in its top-10 holds. If you’re looking for a more-steady ride in US-materials, VAW could be a better bet.
iShares S&P Global Materials (MXI) is the global high-volume materials ETF. MXI holds similar stocks as XLB with global companies like BHP Billiton (BLT.L), Rio Tinto (RIO.L), and Anglo American PLC (AAL). Although MXI has yet to follow XLB’s breakout, it’s on a more steady uptrend compared to it’s US-only counterpart. If you’re looking to profit from global materials, MXI is the broad-based way to go.
You could always go deeper in the ETF realm. If MXI doesn’t fit you’re your style, you could trade a newer, more concentrated product like the one we mentioned last Wednesday: EMT. Emerging Markets Titans Metals & Mining Fund (EMT) focuses on emerging markets metals and mining stocks – a solid materials play.