In a little over eight months on the market, iShares S&P Global Materials has
done little but reward investors, gaining 41.85% (through May 31) since its
September 2006 inception.
Booming international growth, particularly insatiable demand from China and
other developing nations, boosted the price of many commodities to the point
that the producers of those materials—< minerals and metals, chemicals, steel,
and forestry products—enjoyed a tide of steadily strong profits and rising stock
prices.
That’s made MXI (through June 19) the top performer among the 43 funds in Don
Dion’s Fidelity Independent Adviser ETF Momentum Tracker newsletter for
six- and nine-month returns.
We added MXI to our ETF Momentum Tracker Portfolio on December 13, 2006,
when it first hit No. 6 on the Sector Rankings Table. Since then, it’s risen
almost 25% (through May 31) and climbed the rankings, recently checking in as
the top fund.
MXI is poised to gain from the commodities boom, in part because of its exposure
to European stocks and metal producers. European names make up nearly 40% of the
ETF’s portfolio. Broad European markets hit 6-year highs this year, pushed in
part by speculation of major deals in the chemical industry: Rumors that DuPont
may make a play for BASF (up 14% for the last three months) or that Dow (up 7%
for three months) could be a takeover target pushed up the prices of the latter
two stocks. All three are top 10 holdings of MXI.
Likewise, a price boom in metals, fueled by China, limited supply, and
speculative investors, helped the fund over the past three months. Metal prices
were shaky to start the year, as investors worried about a global slowdown. But
stronger-than-expected demand from China improved the pricing environment,
especially for copper, often a pacesetter for other metals, and stainless steel.
Prices for nickel, a stainless component, more than doubled in the last year.
That’s good news for four of MXI’s top five holdings, accounting for more than
20% of the ETF’s portfolio: BHP Billiton Limited, Anglo American, and Rio Tinto
are the top three holdings, with BHP Billiton Plc (the firm’s London-based
operation shares a board and management team with Australia’s BHP Limited) at
No. 5. They’ve averaged a stock price gain of 30% over the past three months
ending May 31.
Finally, a weak dollar helped MXI, because foreign stocks tend to rise in dollar
terms when the dollar is weak, as do U.S.-based stocks with major international
operations.
The fund’s foreign allocation of more than 75% gives it indirect access to China
through major investments in Japan (12.4% of assets, third behind the U.S. and
the U.K.) and Australia (fourthbiggest at 8.5% of assets).
That global exposure has been kind to investors since the fund’s inception,
although MXI isn’t the only materials ETF on the move.
Within the materials sector, MXI’s mix of 122 stocks gives it some
diversification. It’s also well positioned to outperform other materials funds
when the U.S. economy slows in comparison to the world’s.
During this long run-up, investors should remember that the sector and the fund
can be risky, thanks to its highly cyclical portfolio. With investor sentiment
as fickle as it’s been in recent months, things could take a turn for the worse
if there were signs of a global slowdown. Recent investor speculation that
either the Federal Reserve or the Chinese Government could raise interest rates
to combat inflation or curb economic growth would hurt metals prices.
Performance:
Market return vs. Index*
YTD** 19.65% +7.5
1 month 0.24% +1.39
3 month 18.0% +6.08
*Index: MSCI EAFE
**Through May 31, 2007
Source: Morningstar
Top 10 Holdings as of June 7, 2007
BHP Billiton Ltd. 5.07%
Anglo American Plc 4.72%
Rio Tinto Plc 3.94%
Billiton Plc 3.34%
BASF AG BHP 3.14%
Bayer AG 2.84%
E.I. Du Pont de Nemours 2.51%
Arcelor Mittal 2.40%
Dow Chemical 2.33%
Nippon Steel 2.20%
Source: iShares.com
For more information about ETFs subscribe to Don Dion’s Fidelity Independent
Adviser ETF Momentum Tracker at www.fidelityadviser.com or call us at
1-800-548-3797 for more information.
ETF Momentum Tracker is an online newsletter with weekly updates. Other company
newsletters are Fidelity Independent Adviser, Retirement Income Guide, Sector
Momentum Tracker, ETF Report, Health & Wealth Adviser and Powershares Momentum
Tracker. Don Dion’s affiliated company, Dion Money Management, Inc., provides
money management services to clients. As of June 1, 2007 Dion Money Management,
Inc. has over 1,850 clients with $850 million in assets under management. Past
performance is not a guarantee of future results. All investments involve risk,
including loss of principal.
