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Why Materials & Mining ETFs Are Riding Higher

Sanghamitra Saha

Things have been going great for materials industry this year for a host of reasons. Several corners like mining, chemical, and oil and energy are showing promise this year. One of the biggest materials ETFs S&P 500 Materials Sector SPDR (XLB) has gained 10.4% this year,while the fund suffered a lot in 2018 and is still down 7.4% in a year’s time. The space is now hovering around a one-month high and deserves a special mention for rallying on Feb 20.

Let’s take a look what’s driving material and mining ETFs.

U.S.-China Trade Optimism

China is one of the biggest consumers of materials. The fate of the one of the key companies in the space, DowDuPont DWDP, is closely associated with the U.S.-China trade war. Though management believes that DowDuPont “has experienced little impact from China's tariffs on U.S. petrochemicals because the company can supply China and Asia through its non-U.S. operations,” some investors remain skeptical.

Tariffs are also expected to increase the company’s cost structure to some extent. The company also faced pressure on its agriculture business as China has started purchasing more soy beans from Brazil and imposed a 25% tariff on U.S. soybeans. Thus, stronger cues of improvement in the U.S.-Sino trade relation this year helped material stocks to rally. DowDuPont, a major stock in most materials ETFs, saw shares gaining 3% on Feb 20 on hopes of trade deal.

Optimistic Company-Specific News

Praxair, the wholly owned subsidiary of Linde plc LIN, another major holding of materials ETFs, announced an expansion on Feb 11. The expansion entails Praxair to double the capacity of its plant in Neosho, MO.

On the other hand, several asset management companies started taking interest in DowDuPont. Assenagon Asset Management S.A. boosted its stake in DowDuPont by 1,905.9% in Q4, according to its most recent 13F filing. Advisors Asset Management upped its position in shares of DowDuPont by 4.8% in Q2 and now owns 272,035 shares of the company’s stock after purchasing an incremental 12,478 sharesin Q4. Legacy Bridge LLC boughta new stake in DowDuPont in Q4.  Bogart Wealth LLC, Douglass Winthrop Advisors LLC and Stock Yards Bank & Trust Co. lifted its position in shares of DowDuPont by 46.5%, by 0.3% and by 0.9% in Q4, respectively.

Promising Chemical Industry

Most of the funds in the sector have huge focus on chemicals, containers & packaging and metals & mining. The outlook for the American chemical industry offers a promising outlook. The American Chemistry Council (ACC) projects national chemical production (excluding pharmaceuticals) to rise 3.6%in 2019, after 3.1% growth in 2018. Sustained demand across light vehicles and housing markets as well as steady manufacturing sector are expected to spur growth. New capacity additions should bump up basic chemical productions.

Global Packaging Industry on the Rise

The Containers - Paper and Packaging industry has also been on an uptrend. While a U.S.-China trade deal would give a boost to exports and demand for packaging, global urbanization, in any case, is lending a hand to the growth of this industry. The fast emergence of e-commerce has significantly aided demand in the industry (read: Material ETFs Stand Tall Amid Weak Q4 Earnings).

A Dovish Fed

Apart from the said causes, the Fed also came up with dovish comments. The Fed indicated still-subdued inflation led the central bank to consider a “patient” approach to future rate hikes. A dovish Fed results in a subdued greenback, which in turn boost commodities’ prices. This along with a hopeful trade deal has been benefiting mining ETFs like Global X Copper Miners ETF COPX. The fund was up 3.1% on Feb 20 and added about 1.1% after hours (read: Dovish Fed Minutes Should Boost These ETFs).

ETFs That Have Been Hitting Highs

Below we highlight a few materials ETFs that have been hovering around the one-month high and gained considerably on Feb 20.

COPX – Up 3.11% on Feb 20

S&P Metals & Mining SPDR XME – Up 2.38%

DWA Basic Materials Momentum Invesco ETF PYZ – Up 2.2%

Global Metals & Mining Producers iShares MSCI ETF PICK – Up 2.1%

US Basic Materials iShares ETF (IYM) – Up 2.0%

S&P 500 EW Materials Invesco ETF (RTM) – Up 1.80%