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Materials ETFs
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About Materials ETFs |
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Materials ETFs Overview and forecast
The materials index, understandably, as an integral sector across the economy, has been on the receiving end of a selective battering from the economic meltdown. Each of the big names in the materials index has had its own set of issues. Not all of the materials index problems are their own problems, either.
A corporation like Dow Chemicals, for example, a major index component, anyone's idea of a proven, pretty good market investment, has had to deal with the fact that its clientele have been virtually nuked by the economy.
Just about anything which hits the other sectors can hit them, directly. Industrials, construction, health, agriculture, you name it, the Materials index takes the collateral damage when one of the other sectors is under stress. The 12 month returns on Materials ETFs are a sea of red. One ETF went down by 84.93%, and if the others did noticeably better, it was only relative. The best performance was still down by 15.97% at the time of writing, late April, 2009.
Only in the first three months of 2009 have returns started to come back to positive territory, and nobody could call those returns any but the result of the tide coming back in with businesses adjusting to the new economic conditions. Stock values have ?stabilized? to the point of looking a bit better, if still neurotic by nature, and nobody's making any rash promises about future performances.
That's just as well, because for the materials sector, a recovery isn't a done deal. In this sector, everybody else has to get better before it does. The Materials index ETFs contain a series of corporate heavyweights, and that's one thing that's worked against them during the meltdown. The materials sector is the beneficiary and the victim of its client markets. The big materials corporations are in lock step with the wider market indices, and as institutional investments, they're just as prone to the market's defensive moves as any other big corporations. They can be great market performers, but they have that basic nature as investments.
Short term (2 months)
In two months, the Materials ETFs could achieve some further redemption and return to profitability. But until there are clear indications of a pick up in demand across sectors, you'd have to expect a patchy effect across the different mixes of assets. The Materials ETFs, ironically, have a good selection of good stocks to work with, but the environment is still pretty negative.
It would be extremely simplistic to assume that the materials index will perform above a realistic baseline for its own markets.
Medium term (2 years)
The materials sector does have one very strong suit, and it will work in favor of the Materials ETFs down the track. The sector is a supplier of essentials, and demand does have some natural growth factors. The two year period allows a shakeout of the deadwood from the client base, too. It's reasonable to assume that rationalization will occur in the US clientele, and if there's some short term pain, the medium term will be a lot healthier for it.
The Materials ETFs Net Asset Values can be expected to gain some weight over this period if the expected slow return to stronger economic activity occurs. The materials sector is generally considered one of the litmus tests of real economic health, and the ETFs will ultimately benefit when the positive signals come through. Positioning for recovery will be on the mind of many analysts, and the Materials ETFs, on the face of it, would look good on that basis.
Long term (5 years)
Unless there are more serious economic problems, the long term look for the Materials ETFs is fairly solid. These corporations which form their assets are suppliers, with global reach. Although they are directly linked to the US markets, they can develop other markets as an offset, and they do have great capacity. They're highly competitive, in their own fields.
A brief look at the holdings of the Materials ETFs shows instantly that there are a lot of major league corporations in their portfolios, at various weightings. That's the strength of these ETFs, and unlike other sectors, materials demand is likely to pick up quickly. In five years, these ETFs could be performing very well.
Qualifier to projections
In this case the qualifier is an upside, not a downside. There are both direct business, and capital possibilities, available to the materials sector heavyweights. The materials sector can go to work on opening up new markets for themselves. It's quite likely that they will do that, and sooner rather than later. Realistically, there's a strong case for these big corporations taking the initiative, rather than just waiting for their markets to spring back to life.
That would instantly add a lot of strength to the Materials ETFs. Their investment value has been affected more by a comatose economy than their actual values. It's also very likely that these big corporations will go to work on both direct market and corporate acquisitions, to achieve a strategic capital result. Some of the biggest corporations in the US are materials sector companies, and they do have real opportunities in this environment.
Materials ETFs Overview and forecast
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Last Updated on: 2010-01-14 02:03:40 |
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