Although the economy continues to hum along, some sectors have
had trouble picking up steam in 2012, despite their highly
sensitive nature. In this space, a curious case has undoubtedly
been in the basic materials sector, specifically when investors
look at the mining segment.
In this corner, the broad materials sector, as represented by
the ultra popular Materials Select Sector SPDR ETF
(XLB) has seen solid
performance when compared to the focused mining industry as
represented by the SPDR S&P Metals & Mining ETF
(XME). In fact, XLB has
performed roughly on par with the S&P 500 in year-to-date terms
while XME has lagged by almost 1,000 basis points.
This is especially surprising given the increased economic
activity across the globe and the lack of huge negative catalysts
for the markets, at least at this time. Thanks to this, one would
assume that mining firms would be on the mend after their
disastrous 2011, and would be among the top performers in the
markets. However, this appears to be one case in which the broad
focus of a fund has severely hurt its returns when compared to its
more specialized peers (read Three Commodity ETFs That Have Not
Surged).
So far in 2012, XME is actually one of the worst performing ETFs
in the materials sector, with only some of the gold mining funds
matching the SPDR product in terms of lackluster performance. This
also represents a sharp departure from the trailing one year period
in which XME performed pretty much in-line with its more
specialized peers in the space, as most had fallen by at least 20%
thanks to ongoing economic woes across the globe.
Now, many of XME’s counterparts are decidedly leaving the
popular SPDR fund in the dust, suggesting that new leadership could
be in the mining and basic materials space as we head further into
2012. In light of this, investors may want to consider cycling out
of the broadly focused XME and into the following four specific
funds instead. These funds all had terrible 2011s but are up double
digits so far in 2012, far outpacing XME and many of the broad
basic materials industry products as well (see Is USCI The Best
Commodity ETF?).
While there is no telling if this trend will continue, investors
have to be encouraged by the recent economic developments and how
this could impact ETFs in this space going forward. With that being
said, when things go bad this specialized mining segment is among
the worst places to be; all four of the funds on this list lost
more than 40% in the 2011 calendar year.
Yet, with that being said, the strong performance figures have
to be intriguing to many, and last year’s losses could imply that
there are significant values to be had, suggesting now could be the
time for these basic materials ETFs:
Market Vectors Rare Earth/Strategic Metals ETF
(REMX)
For investors seeking a play on a vital but tiny segment of the
mining industry, REMX could be an interesting pick. The fund is up
15.3% so far this year, coming back strong after 2011’s 41.8% loss.
REMX tracks about 30 companies that mine these metals which go into
everything from weapons and jet engines, to flat-panel TVs and
hybrid cars.
As a result, these companies are growing in importance to the
world economy, especially in high tech industries. Obviously, this
is a recipe for high levels of volatility a factor only multiplied
by the product’s focus on mid (30%) and small cap (42%) securities
(read Time To Buy The Rare Earth Metals ETF?).
Global X Uranium ETF
(URA)
Thanks to Fukushima, URA had a terrible 2011, falling by almost
61% on the year. However, the fund has come roaring back in 2012,
adding almost 20.3% so far this year. As a result, this product
could be an interesting pick for intrepid investors seeking to make
a concentrated play on the uranium mining industry.
The fund holds 20 securities in its basket, putting a heavy
focus on American, Australian, and Canadian micro and mid cap
firms. Top holdings include Cameco
(CCJ) and
Paladin Energy
(PALAF) which make up
21.4% and 16.9% of the product, respectively (read Japan ETFs, One
Year After Fukshima Disaster).
Global X Lithium ETF
(LIT)
While LIT hasn’t gained as much as some on this list, it is up
‘just’ 16.9% so far this year, it has also come back strongly after
its -39.3% performance in 2011. The fund also isn’t a pure mining
fund as it looks to also invest in companies that are
engaged in lithium battery development as well.
This factor can make the fund less dependent on the lithium
mining industry although the rest of the exposure often filters
into high risk tech names instead. Additionally, it should be noted
that none of the fund is in large cap securities; a majority is in
mid caps while micro cap companies account for another 41% of
assets (see Three ETFs For An Iranian Crisis).
Global X Aluminum ETF
(ALUM)
Unarguably the least ‘sexy’ of the list, this product tracking
companies in the aluminum industry is on a tear so far in 2012. The
fund has gained about 15.2% this year, although it lost about 41.2%
in 2011, suggesting that it still has a long way to go in order to
break even for the previous 52 week period. The ETF has 23
securities in its basket, suggesting high levels of concentration
too.
However, the fund is quite spread out from an individual country
perspective as four nations—U.S., China, Japan, and the UK—account
for at least 14% of total assets, while another nine countries also
receive an allocation. Like many products on the list, pint sized
companies dominate although in this case large caps do account for
roughly one-third of total assets.
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Author is long LIT.
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