Materials sector exchange traded funds could stuck in a rough patch as chemical industry activity slows.
The Chemical Activity Barometer (CAB), which tracks production, inventory and selling prices of numerous chemicals, along with prices of chemical stocks, only rose 1.8% in August year-over-year, the slowest pace since 2012, reports Anthony Feld for Bloomberg.
Kevin Swift, chief economist for the American Chemistry Council and creator of the CAB index, warned that declines in chemical demand have historically preceded drops in industrial output.
“Recent declines in the chemical barometer, in part, reflect a stronger U.S. dollar and weaker growth abroad,” Swift told Bloomberg.
Swift argues that the chemical index’s recent weakness indicate that the pace of manufacturing could slow into 2016 – about 95% of manufactured goods are made from chemicals. Additionally, the chemical index leads the National Bureau of Economic Research’s peak business cycle by an average of eight months and its troughs by an average of four months.
Year-to-date, the Materials Select Sector SPDR (NYSEArca: XLB) declined 14.1%, Vanguard Materials ETF (NYSEArca: VAW) decreased 14.2% and iShares U.S. Basic Materials ETF (NYSEArca: IYM) dropped 17.9%.
Chemicals producers make up a significant portion of the materials sector, including 74.3% of XLB, 60.5% of VAW and 68.8% of IYM.
The manufacturing and industrials industry has also been underperforming this year. Year-to-date, the Industrial Select Sector SPDR (NYSEArca: XLI) fell 11.6%, Vanguard Industrials ETF (NYSEArca: VIS) decreased 10.2% and iShares U.S. Industrials ETF (NYSEArca: IYJ) dropped 9.0%.
Investors who believe the chemicals industry will continue to experience weakness ahead can look to inverse materials ETFs to hedge against a further dip. For instance, the ProShares Short Basic Materials (NYSEArca: SBM) follows the inverse or -100% daily performance of the Dow Jones U.S. Basic Materials Index and ProShares UltraShort Basic Materials (NYSEArca: SMN) reflects the inverse 2x or -200% performance of the basic materials sector.
Additionally, if the weakness in chemicals is an indicator of potential slowdown in manufacturing, can hedge against further dips through the ProShares Short Dow30 ETF (NYSEArca: DOG), which tries to reflect the -100% daily performance of the Dow Jones Industrial Average. For the more aggressive traders, the ProShares UltraShort Dow 30 ETF (NYSEArca: DXD) takes the -200% of the Dow Jones and the ProShares UltraPro Short Dow30 (NYSEArca: SDOW) reflects the -300% of the Dow. The ProShares UltraShort Industrials (NYSEArca: SIJ) tracks the inverse 2x or -200% daily performance of the Dow Jones U.S. Industrials Index. [Do You Know How Your Leveraged ETFs Work?]
For more information on the materials sector, visit our materials category.
Max Chen contributed to this article.