S&P Bearish on Materials ETFs
S&P Capital IQ downgraded its rating on the materials sector to Underweight from Marketweight on Europe's worsening sovereign debt crisis and slowing emerging markets growth today, and the research firm has a similarly bearish view on several marquee materials ETFs.
"For chemicals, the largest Materials sector industry group, representing 54% of market capitalization in the S&P 500 Materials sector as of June 22, the team has a positive fundamental outlook due to potential for higher pricing as long as economic growth worldwide continues to look sufficient," S&P Capital IQ said in a research note.
On the downside, S&P notes that chemicals producers could face increased risks if global growth continues to wane because the firms are highly exposed to international demand trends. S&P Capital IQ has three-star ratings on Dow component DuPont (NYSE: DD), Dow Chemical (NYSE: DOW), Air Products (NYSE: APD) and Airgas (NYSE: ARG).
Those four stocks combine for almost 23 percent of the Materials Select Sector SPDR's (NYSE: XLB) weight. XLB, the largest materials ETF, with over $1.9 billion in assets under management, is rated Underweight by S&P. The ETF, which has an expense ratio of 0.18 percent, has lost 8.2 percent in the past three months. Some of the fund's other top-10 holdings include Monsanto (NYSE: MON), Newmont Mining (NYSE: NEM) and Freeport-McMoRan (NYSE: FCX).
S&P also has an Underweight rating on the Guggenheim S&P 500 Equal-Weight Materials ETF (NYSE: RTM). DuPont, Dow Chemical, Airgas and Air Products combine for about 13 percent of that ETF's weight. RTM has almost $31.3 million in assets under management and charges an expense ratio of 0.5 percent. The fund has lost 10.8 percent in the past 90 days.
The First Trust Materials AlphaDEX Fund (NYSE: FXZ) also landed an Underweight rating from S&P. That ETF's chemicals exposure stands at 52 percent of its overall weight though DuPont, Dow, Airgas and Air Products represent just 5 percent FXZ's weight. FXZ's top holdings are CF Industries (NYSE: CF) and Valspar (NYSE: VAL).
The $172 million fund, which charges 0.7 percent annually and is home to 57 stocks, is the worst-performer over the past three months of the trio of ETFs mentioned in the S&P note. Over that time, FXZ has tumbled 13.1 percent.
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