Chemicals are in everything and are a necessity in nearly every product we consume. Since chemicals are at the early position in the supply chain, an uptick in this area could prove to be an interesting indicator for future growth of our economy. From cell phones to soap, there is a chemical compound that is an intrical part of the component or product that needs to be ordered first to start the manufacturing process. Packaging of these products contain major plastic resins which showed year over year growth of 6% in March of 2020.
How can you track it?
The American Chemistry Council created the Chemical Activity Barometer, CAB, which is a multi-factor index that measures the chemical industry activity by amount of orders, hours worked, public stock data, chemical price information and several other indicators. Check the fact sheet here.
According to the fact sheet, ‘Applying the CAB back to 1912, it has been shown to provide a lead of two to 14 months, with an average lead of eight months at cycle peaks as determined by the National Bureau of Economic Research.’
I’m not going to get into the index any further than this chart which depicts the CAB versus the Industrial Production Index, the vertical grey areas are past recessions.
Finding ETFs to Help Track Chemical Stocks
Putting this information into practical use, you can search our database of ETFs in the Materials sector. I feel that we tend to forget that chemicals make up a large part of the material sector, at least I did. The sector includes companies in the areas of manufacturing chemicals, mining and metal refining, and forestry products. But look at the holdings by weight and you’ll find a tilt towards chemical stocks.
I ran the screener for ETFs in the Material sector with an expense ratio of below 0.50% and found 8 ETFs:
Further analysis led me to narrow it down to three, XLB, VAW and IYM.
XLB – had the most concentrated positions in chemicals due to it’s low number of constituents equalling 28, low expense ratio and high liquidity were factors as well.
XLB top 10 holdings:
VAW was second, also a very low expense ratio. VAW to 10 holdings:
IYM third, since it had the lowest avg daily volume and highest expense ratio. IWM top 10 holdings:
Side by side you can quickly compare stats at a glance.
While all are good candidates to watch for a turn in the chemical and material sector, they all have different attributes that you can relay to your clients in an easy comparison, and show a process of how you are acting in their best interest.
If they happen to obtain a Bullish PortfolioWise rating and start to show positive relative strength, you could start to allocate toward this sector and potentially use its new trend to allocate towards sectors that tend to do well in an economic recovery. See my post on Investing in a Black Swan Event where I touch on sector rotation in the business cycle.
Pete Carmasino is Managing Director at PortfolioWise, an ETF ratings system powered by Chaikin Analytics. Pete has over 25 years in the capital markets industry. He previously ran his own RIA firm for several years where he created his own ETF model strategy. In prior roles, Pete was a High Net Worth Advisor and Institutional Sales Trader.
Follow Pete on Twitter @carmasino.