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More Upside in Store for Materials ETF


Guess what the best-performing on the nine sector SPDR ETFs has been over the past three days. Confirming that a cyclical rotation did in fact take place, the answer is the Materials Select Sector SPDR (XLB) .

Cementing the notion of a cyclical rotation, XLB’s industrial and discretionary equivalents rank second and third over the past 90 days, but focusing on materials ETFs might be the way to go in the near-term. [A Look at the Major Sector ETFs]

In addition to XLB, the iShares U.S. Basic Materials ETF (IYM) is also worth considering. That ETF has returned almost 10% over the trailing three-month period and one technical analyst sees the potential for further upside.

“After forming a bullish reversal candle on big volume during the second week of October, IYM broke out to new 52-week highs on heavy volume the following week,” said Deron Wagner of Morpheus Trading Group.

IYM is up 4.6% since the start of October. The ETF has $762.3 million in assets under management and an annual expense ratio of 0.45%.

“On the shorter-term daily chart, a sharp move off key support of the 50-day moving average subsequently found resistance around $78, where $IYM has since been forming a bull flag type consolidation (a shallow correction by time, not price),” added Wagner.

Wagner believes IYM will hold support at its 10-day moving average before resuming its uptrend “within the next few days.”

The ETF’s top-10 holdings combine for nearly 60% of the fund’s weight. That group incudes Monsanto (MON), Dow component DuPont (DD) and Dow Chemical (DOW).

A rosy technical assessment of materials ETFs jibes with upcoming seasonal trends. November marks the start of the best six-month period in which to own stocks, including cyclical sectors.

“Rotating into the Consumer Discretionary, Industrials and Materials sectors from November through April, rather than back into the market, beat the S&P 500 by 640 basis points per year, and resulted in an even lower standard deviation of 13.7,” said S&P Capital IQ’s Sam Stovall earlier this week. [ETFs for Buy in November]

iShares U.S. Basic Materials ETF