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Basic Materials Sector ETFs and the Santa Rally


Shorting basic materials this time of year could turn out to be a good call in the event that Santa can't ride his sleigh.

Despite continued (should I say permanent?) European woes, investors around the world are anticipating the seasonal "Santa Rally" in markets, which will hopefully carry us higher into the end of the year.

After German Chancellor Angela Merkel and company managed to stave off the European crisis a few weeks ago, the Santa Rally seemed to be under way until fears of "contagion" spread to Italy and Spain and investors realized that Greece still remains on the brink of collapse.

Should the Santa Rally resume, one sector that could provide enormous profits from a "tinsel" economy would be the basic materials sector, which, of course, has a variety of ETFs tracking it. The basic materials sector typically rises with a strong economy; as an economy's growth increases, so does the demand for basic materials including precious metals, oil and gas, forestry products, synthetics, chemicals, and other raw materials.

Because the markets (and economy?) are currently showing modest signs of growth, basic materials could produce profits that would more than stuff one's Christmas stockings this holiday season if and when the European crisis is ever resolved.

The most popular basic materials sector ETF is the Materials Select Sector SPDR (XLB), which directly tracks the S&P Materials Select Sector Index.

Charts courtesy of

The next basic materials ETF that is worth a look is the iShares Dow Jones US Basic Materials Sector Index Fund (IYM). IYM currently has 70 holdings in the Dow Jones US Basic Materials Sector Index and could easily add to this year's Christmas cheer if the "Santa Rally" continues.

Year to date, both of these funds have lost money due to the volatility in markets and the ongoing soap operas presented by both the European and American governments. However, seasonality and oversold levels on a technical basis would indicate that there is hope that we will finish up the year with a "Santa Rally," and if we do, both of these funds would likely be leaders as the economy shows signs of renewed strength and durability.

If, however, the anticipated "Santa Rally" does not take off or Europe implodes, then the ProShares Ultrashort Basic Materials Fund (SMN) is designed to short the basic materials sector and so seek profits in down markets. This fund is also leveraged 2x, so investors must be careful using this fund because gains or losses are further magnified due to market swings and inherent tracking error in the design of leveraged exchange traded funds. However, shorting basic materials this time of year could turn out to be a good call in the event that Santa can't ride his sleigh:

As always, ETFs offer investors a chance to make money in both up and down markets while at the same time diversifying portfolios across various sectors and exchanges.

Editor's Note: Read more from John Nyaradi at Wall St. Sector Selector, a financial media site specializing in exchange traded funds, global markets and economic analysis.

Twitter: @WSSectorSelect

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No positions in stocks mentioned.

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