Despite signs of slowing growth in some emerging markets, there are also signs the U.S. economy is rebounding and China has delivered plenty of signals in recent weeks that is experiencing a turnaround of its own. That could be just one of the catalysts to lift materials ETFs in 2013, though S&P Capital IQ has a Neutral view of the sector.
"We foresee monthly PMI data for each of the major economies, including China, continuing to show improvement as the year progresses. In addition, EPS growth in the fourth quarter of 2012 for this S&P 500 sector is expected by Capital IQ consensus estimates to be 3.9% and exceed that for the S&P 500. In 2013, earnings are expected to be similarly strong. Finally, our technical outlook has been raised to neutral with a bullish bias, from neutral with a bearish bias," S&P Capital IQ said in a recent research note.
The research firm is somewhat bullish on diversified chemicals firms, which could favor an ETF such as the iShares Dow Jones U.S. Basic Materials Sector Index Fund (IYM).
"Fundamentals for diversified chemicals, the largest sub-industry in the sector, are positive, according the S&P Capital IQ equity analysts. We think the decline in U.S. natural gas prices relative to global crude oil prices has improved the feedstock cost competitiveness of the U.S. petrochemical industry versus other global regions, such as Europe, thus helping boost U.S. industry exports," said S&P Capital IQ.
IYM, which is home $543.4 million in assets under management, features Dow component DuPont (DD), Dow Chemical (DOW), Air Products & Chemicals (APD) and other chemicals names among its top-10 lineup. S&P rates IYM as Marketweight. The ETF has an annual expense ratio of 0.47 percent.
S&P Capital IQ also has a Market-weight rating on the Vanguard Chemicals ETF (VAW). Due to a recent fee reduction announced by Vanguard, VAW now has the lowest expense ratio of any materials ETF at 0.14 percent per year. VAW allocates 19.3 percent of its weight to diversified chemicals names, though its largest holding is crop nutrients maker Monsanto (MON).
S&P is also bullish on diversified metals and mining names. The firm said its "equity analysts have a positive fundamental outlook for the next 12 months, as we believe sales and earnings will recover from 2012's depressed levels. Our expectation reflects our view that prices for aluminum, copper, nickel, zinc, iron ore and coking coal will rebound from 2012's levels on higher demand and less rapidly rising output."
The research firm has a Market-weight rating on the Materials Select Sector SPDR (XLB). That $2.55 billion ETF is includes mining names such as Freeport-McMoRan (FCX) and Newmont Mining (NEM) along with Monsanto and DuPoint among its top holdings.
S&P is less enthused about the SPDR S&P Metals and Mining ETF (XME), which it rates Underweight. With steel stocks such as U.S. Steel (X) and Nucor (NUE) accounting for over 36 percent of XME's weight, the ETF carries a high beta of 1.67 and is highly dependent on a strong economies in the developed and emerging worlds to drive its returns. Investors should also note XME has an almost 15 percent to beaten down coal and consumable fuels names.
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