The materials sector is about to enter into a period of seasonal strength from Oct. 28 to May 5. Average return per period during the past 10 periods of seasonal strength was 16.9 per cent. The trade was profitable in 10 of the past 10 periods. The easiest way to participate during the period of seasonal strength is to accumulate exchange traded funds that track the sector. Fourteen ETFs in the sector are listed on U.S. exchanges.
The materials sector includes companies in the chemical, metals and mining, paper and forest products, containers and packaging, and construction materials industries. Seasonal increases in demand for chemicals, lumber and base metals are notable each year starting in November.
The most actively traded ETF in the sector is SPDR Materials at $33.37 (U.S.). The ETF focuses primarily on the chemical subsector with a 61.2-per-cent weight and the metals and mining subsector with a 28.9-per-cent weight. Units hold the 33 material stocks that are part of the S&P 500 Index. Largest holdings by weight are Dupont, Monsanto, Newmont Mining, Freeport McMoran Copper & Gold, Praxair, Air Products and Chemicals, Dow Chemical and Mosaic. Management expense ratio is 0.20 per cent.
A distant second on the list of ETFs based on activity is iShares Dow Jones Basic Materials at $63.99. The ETF holds 70 U.S. based equities. The chemical subsector represents 57.7 per cent of the portfolio's weight and mines and metals represent 38.7 per cent. Largest holdings by weight are Dupont, Freeport McMoran Copper & Gold, Dow Chemical, Praxair, Air Products & Chemicals and Mosaic. Management expense ratio is 0.47 per cent.
ETFs in the U.S. materials sector are not to be confused with ETFs in the Canadian materials sector. iShares offers the S&P/TSX CappedMaterials index fund at $19.75. Units hold 75 securities with 80 per cent invested in the metals and mining sector and only 19 per cent invested in the chemical sector. Approximately 40 per cent of the ETF is held in three stocks: Barrick Gold, Potash Corp and Goldcorp. Management-expense ratio is 0.55 per cent.
On the charts, the S&P Materials Index at 210.01 is not attractive at current prices. Since Oct. 4, units have gained 20.3 per cent. Short-term momentum indicators are trending higher, but already have reached overbought levels. Strength relative to the S&P 500 Index has been slightly positive since Oct. 4 when U.S. equity markets reached an intermediate low. The index moved above its 50-day moving average on Friday, an encouraging technical event. Optimal entry point for a seasonal trade is accumulation on weakness closer to the 190 level.
Editor's Note: An earlier online version of this report incorrectly identified the most actively traded ETF in the sector as the SPDR Financial, XLF. This error has been rectified.
Don Vialoux is author of a free daily report on equity markets, sectors, commodities and Exchange Traded Funds. Reports are available at www.timingthemarket.ca . Mr. Vialoux also is research analyst for JovInvestment Management Inc.