Over just the past week, the Materials Select Sector SPDR (NYSEArca: XLB), Vanguard Materials ETF (NYSEArca: VAW) and the iShares U.S. Basic Materials ETF (NYSEArca: IYM) have each posted losses in excess of 5%, but the bad times for materials stocks and exchange traded funds appear unlikely to soon end.
Recent weakness in a widely followed chemicals index could be a sign 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.
Late-cycle ebullience has retired as investors have grown wary of sluggish materials and industrial ETFs. Now, some technical analysts see more downside brewing for XLB and the materials sector. XLB and other materials ETFs have also been hampered by investors preferring low volatility sectors over higher beta fare. Materials stocks reside in the latter category.
Beta is a common measure of volatility, or systematic risk, of a security or portfolio, compared to the broader marketplace. A beta reading above 1 indicates that the security is more volatile than broader equities market, whereas a beta of less than 1 corresponds to lower volatility. Potential investors should know that a higher beta may generate greater returns at greater risks while low-beta securities are considered a more conservative play.
“The sector has been one of the hardest hit by the collapse of commodities prices, tumbling 15 percent year to date. After news that the Asian Development Bank cut its economic forecasts due to concerns about China and India, commodities such as silver and copper plunged more than 3 percent Tuesday,” reports CNBC.