For investors looking to avoid potential underperformance, iShares U.S. Basic Materials ETF ( IYM ) is probably on their radar now. The fund just touched a 52-week low, and shares of IYM are down roughly 28% from their 52-week high price of $88.04/share.
But is more pain in store for this ETF? Let's take a quick look at the fund and the near-term outlook on it to get a better idea on where it might be headed:
IYM in Focus
IYM offers exposure to 54 U.S. materials stocks. It has a definite tilt toward large caps with key holdings in chemical segments. The fund charges investors 43 basis points a year in fees and is largely concentrated on the top three firms - Dow Chemical ( DOW ), DuPont ( DD ) and Monsanto ( MON ) - that make up for a combined 26.5% share (see: all the Materials ETFs here ).
Why the Move?
The material sector has been an area to watch lately given that the slowdown in the chemical industry is unlikely to reverse any time soon. This is especially true as the Chemical Activity Barometer (CAB), which is a leading economic indicator of chemical industry activity, dropped 0.4% in September, following a revised 0.2% decline in August. Weak agricultural fundamentals, sluggish demand in energy markets, and persistent slowdown in China - the world's second largest consumer of raw materials - have been the major culprits that are weighing on the profits of the chemical makers and the stock prices.
More Pain Ahead?
Currently, IYM has a Zacks ETF Rank #4 (Sell), suggesting its continued underperformance in the coming months. Further, many of the segments that make up this ETF have the worst Zacks Industry Ranks. So there is still some downside risk signaling caution, and investors should wait until the sector bottoms out before jumping into this ETF.