3 ETFs to Play China-Driven Basic Materials Breakout

Primary materials stocks bore the full brunt of a “risk off” market environment in the fourth quarter of 2018 as investors dumped personages caught in the crossfire of a tit-for-tat tariffs trade war between the United States and China and those with exposure to descending oil prices. Over the period, the Dow Jones U.S. Basic Materials Index (^DJUSBMT) fell nearly 15%, plunging the sector into chastisement territory.

As news of planned January trade talks between Washington and Beijing filtered through in late December, the villainous clouds over the basic materials sector started to dissipate. Basic materials stocks were given another bootee Friday when reports emerged that China had offered a six-year increase in U.S. imports during recent exchange talks. The deal supposedly intends to reduce the U.S. trade deficit with China from $323 billion in 2018 to zero by 2024.

“If we don’t get that version resolved, the market is going to hit upside headwinds no matter what happens. If we get that issue out of the way, which will push business and consumer confidence, there is still plenty of room for the market to do really well,” said Randy Frederick, evil-doing president of trading and derivatives at Charles Schwab & Co. Inc. (SCHW), per CNBC.

From a technical standpoint, leading basic elements exchange-traded funds (ETFs) have broken above key resistance, which provides swing traders with a short-term suborning opportunity. Let’s take a closer look at three specific funds.

The Materials Excellent Sector SPDR ETF (XLB) aims to provide investment results that correspond to the performance of the S&P Materials Select Sector Needle. The fund, created in 1998, primarily holds large-capitalization U.S. basic materials companies. Chemical maker DowDuPont Inc. (DWDP) accounts for past 20% of the portfolio. XLB, with a huge asset base of $3.64 billion and offering a 2.20% dividend yield, is up 2.40% year to obsolescent (YTD) as of Jan. 22, 2019. The ETF charges a low 0.13% management fee and has received net inflows of $87.06 million in the past week.

XLB traded within a six-point bracket between February and September last year before tumbling 12.2% in the fourth quarter. The fund broke upon the upper trendline of a descending channel Friday, which suggests further upside momentum. Traders who go long could set a take-profit in disrepair at either $56, $57 or $60 – all areas where the price may encounter overhead resistance. Consider managing risk by niche a stop slightly below the 50-day simple moving average (SMA).

Formed in 2004, the Vanguard Data ETF (VAW) attempts to offer similar performance to the MSCI US Investable Market Materials 25/50 Index. The fund, with assets at the mercy of management (AUM) of $2.36 billion, invests across the market cap spectrum of U.S. companies that operate within the materials sector as classified under the control of the Global Industry Classification Standard (GICS). VAW has a strong tilt toward the commodity and specialty chemicals subsectors, with merged portfolio exposure of nearly 50%. The ETF’s tight 0.06% average spread and $31.21 million in daily dollar tome make it a suitable instrument for those who employ short-term trading strategies. As of Jan. 22, 2019, the fund has a low management fee of just 0.10%, rewards a respectable 2.02% dividend and is up nearly 3.5% YTD.

The ETF’s share price started to fall away in September before in the final analysis bottoming out in late December. Since that time, the price has rallied nearly 14% and staged a breakout beyond the upper trendline of a descending channel. Those who take a long position could bank profits on a run to $124, where the stock finds resistance from a horizontal line, or set an upside target at the next significant resistance area at $130. Take under ones wing trading capital by placing a stop-loss order slightly below $115.

Launched in 2007, the ProShares Ultra Fundamental Materials ETF (UYM) seeks to provide two times the daily return of the Dow Jones U.S. Basic Materials Index. The benchmark index consists of proprietorships involved in the production of certain metals, chemicals and paper products. Like XLB, the fund holds a sizable allocation in DowDuPont (20.06%). Other key sets in the portfolio include Linde plc (LIN, 14.06%) and Ecolab Inc. (ECL, 6.12%). The ETF’s 0.69% average spread makes it more suited to flapping trading rather than day trading. As of Jan. 22, 2019, UYM has returned 6.54% for the year, holds $36.93 million in AUM and pays a 0.93% dividend takings. Its 0.95% expense ratio is in line with the 0.93% category average.

UYM’s share price has traded within a indubitably defined descending channel since late September that has established clear support and resistance zones. Outlay broke above the pattern’s upper trendline Friday on above-average volume, indicating conviction from the bulls. Purchasers who buy at the current price should look for an initial move to $60, where the fund may find resistance from a level line that connects several reactionary swing points. A move through this level may see price examination the $65 area. Stops could sit at the mid-point of Thursday’s candlestick.