In the chemicals space, Bryan argues that margins could contract as chemical products add new capacity. However, chemical producers are shifting into less-cyclical, high-margin specialty products, but most are still dependent on cyclical basic chemicals.
The fertilizer and agriculture chemical makers also have significant exposure to crop prices as farmers’ incomes are tied to demand. Nevertheless, Bryan believes the long-term outlook remains in place as growing demand for food will support the space, notably from a rising middle class in the emerging markets. [A DuPont Breakup?]
Industrial metals are also tied to growth in the emerging markets as well, specifically China and its infrastructure projects. This space could face headwinds as China shifts from its investment-driven growth model.
Furthermore, miners, particularly gold miners, will have to adapt to falling gold prices while costs remain elevated. Still, the area is trading near record lows and some market observers are waiting for a rebound. [Reason for Optimism With Miners ETFs]
VAW’s sub-sector allocations include commodity chemicals 7.8%, construction materials, 2.5%, diversified chemicals 18.1%, diversified metals & mining 5.7%, fertilizers & argicultural chemicals 11.0%, gold 2.3%, industrial gasses 8.7%, metal & glass containers 3.7%, paper packaging 5.7%, paper products 3.7%, specialty chemicals 21.4% and steel 6.3%. [Bumps in the Road for the Steel ETF]
For more information on the materials sector, visit our materials category.
Max Chen contributed to this article.