“It follows when you track certain basic commodity markets, including copper and crude oil strength or weakness, there will spill over to the materials sector. Weakness in these markets combined with stock market weakness is a recipe for a decline in the overall sector,” he said.

Along with energy and utilities, the materials ETFs are the worst sector performers in 2012.

“In the near term, this sector likely will be challenged by tepid recoveries in developed markets and slowing growth in China. But in the medium term, we expect the outlook for the materials sector to improve as the global economy improves combined with stronger growth from emerging markets,” Morningstar analyst Robert Goldsborough wrote in a report on IYM.

“Developing economies need commodities like industrial metals, steel, and chemicals for new buildings and infrastructure. In addition, anticipated increases in consumption for consumer goods, like automobiles and consumer electronics, also will drive demand for a variety of materials,” he said.

The chart below shows the relative performance of a materials ETF and the S&P 500. When the chart is falling, materials are underperforming the S&P 500.

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