Materials Mess: These ETFs Are in Trouble

These are not the best of times for materials stocks and the corresponding ETFs.

In the first quarter, the Materials Select Sector SPDR XLB gained 4.8 percent. While that does not sound terrible, it is less than half the 10.5 percent returned by the SPDR S&P 500 SPY. XLB's performance also makes it the worst of the nine sector SPDRs.

In fact, seven of the nine sector SPDRs offered double-digit first-quarter returns with only the Technology Select Sector SPDR XLK joining XLB in the single-digit club. Still, XLK's 5.4 percent first-quarter gain is far better than XLB's performance.

Unfortunately for materials bulls, XLB looks like one of the better ETFs tracking this sector. Year-to-date, Monsanto MON an DuPont DD are up 9.86 percent and 7.17 percent, respectively. Those stocks combine for over 21 percent of XLB's weight. XLB has also been helped by the fact metals miners account for just 17 percent of the ETF's weight.

Other materials ETFs have not been so fortunate and several now look imperiled. Take the case of the SPDR S&P Metals & Mining ETF XME. The $609.3 million XME plunged 10.3 percent in the first quarter and that was before Monday's two percent loss (as of 1:30 PM Eastern time).

XME has an ominous sub-sector mix. Alone, gold miners account for 10.4 percent of the fund's weight and as if that is not bad enough, other metals miners account for another 11.6 percent while coal and consumable fuels names represent 17.3 percent, according to State Street data.

Making matters worse is the fact that last week XME made a death cross, the technical scenario where a shorter term moving average crosses below a longer term average. In the case of XME, its 50-day moving average is now slightly below its 200-day line.

Speaking of coal stocks, 2013 is proving to be another tough year for that group. Add in Monday's almost 1.6 percent slide and the Market Vectors Coal ETF KOL is now off 10.2 percent year-to-date. KOL has not made a death cross yet, but the chart indicates it may just be a matter of time.

In another bad sign for KOL, at least four of its top-10 holdings – Joy Global JOY, Peabody Energy BTU, Yanzhou Coal YZC and Walter Energy WLT – reside below their 200-day moving averages. Those stocks combine for over 21 percent of KOL's weight. If KOL violates support at $22.50, a return to $20 seems likely.

Things are not much better for global materials names. The iShares S&P Global Materials Sector Index Fund MXI is now down 5.7 percent this year when accounting for Monday's 0.9 percent loss. A 44 percent weight to metals miners has proven problematic and MXI is now struggling to hold support at its 200-day line.

Additionally, MXI allocates 14.5 percent of its weight to various securities issued by BHP Billiton BHP and Rio Tinto RIO. Australian central bankers and policymakers have already acknowledged mining investment there is declining and that the mining boom will peak later this year, implying upside could be limited for these stocks and related fare.

Another cause for concern: More than a third of MXI's top-18 holdings have exposure to gold mining. That is not a good thing when the Market Vectors Gold Miners ETF GDX is down 18.4 percent this year.

A possible solution for investors looking to profit the woes of the materials sector is the ProShares UltraShort Basic Materials SMN. SMN seeks to deliver twice the daily inverse performance of the Dow Jones U.S. Basic Materials Sector Index.

That is the index tracked by the iShares Dow Jones U.S. Basic Materials Sector Index Fund IYM. If IYM breaks resistance at $52, a run to $55 could be in the offing.

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