Spotlight: Metals & Materials ETFs In Focus (XLB, XME, SLX, JJC, SLV, FCX, AA, RIO)
The “stuff” of industry and manufacturing is at the core of base metals and materials generally. From companies producing raw base metals to end users comprise the constituents for many indexes to which ETF/ETNs are linked. When these areas are vibrant and moving higher you would imagine demand is high and economic growth increasing accordingly. The Materials Select Sector SPDR ETF (NYSE:XLB) is heavily weighted by mining companies with Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) an 11% weighting.
The SPDR S&P Metals & Mining ETF (NYSE:XME) has roughly 40% weightings in companies like Allegheny Technologies, Massey Energy, Alcoa, Inc. (NYSE:AA), Cliffs Natural Resources, Nucor and so forth.
Market Vectors Steel ETF (NYSE:SLX) is heavily weighted by notable companies Rio Tinto Plc (NYSE:RIO) (12%) and Vale SA (12%). Each of these companies is involved in the extraction of base metals whether in Australia, Africa or Brazil.
The iPath DJ-UBS Copper TR Sub-Idx ETN (NYSE:JJC) is structured as a note featuring exposure to copper futures markets. Copper is often referred to as “Dr. Copper” given that demand for the metal reflects economic conditions and forecasts better than most pundits and PhDs can. High prices translate to economic growth logically. The new player on the world scene is of course China and to a lesser extent India. Providers include Australia, Brazil and Chile among others.
The iShares Silver Trust (NYSE:SLV) offers exposure to a metal with both industrial use (semiconductors) and precious metals. Uniquely silver trading on futures exchanges is now in backwardation meaning the front month is priced higher than back month contracts. This indicates high current demand and a lack of supply. Naturally, this is bullish.
At least for now, materials and metals remain strong with only minor (save Silver) drawdowns along the way. All this is quite bullish and indicates strong industrial demand. The key question is, will these higher costs be easily passed along to end users including consumers? If so, then we’ll have the good news of stronger growth but the bad news being higher inflation or stagflation.