Investments that defy logic are more common than you’d think. Even during periods of modest growth of gross domestic product, indices and investment strategies based on basic materials would seem to benefit from improving economic conditions. The two one-year charts below display a disparity of this premise. The first chart is the one-year US GDP, and the other is a one-year chart of the iShares Dow Jones US Basic Materials ETF.
The simple line chart of GDP growth does indicate expansion in the US economy. However, the bar chart of the iShares Dow Jones US Basic Materials ETF indicates choppiness throughout the year with a minimal year-to-year change.
Looking further, the one-year posted return is -0.79%, the three-year return is 4.18%, and the five-year return is -1.04%. It seems that this sector has been in the doldrums, and most likely such a pattern will continue. It just baffles logic how such a non-performer can hold close to $0.5 billion dollars in assets to manage. More clues to this may be found in the top holdings. See the industry allocation chart below.
The largest position of iShares Dow Jones US Basic Materials Sector Index Fund is E I Du Pont De Nemours And Co (NYSE:DD). As of April 30, there is approximately 10.8% of this stock held in the iShares Dow Jones US Basic Materials ETF. Du Pont does exert a strong influence on this strategy.
According to a press release issued at the end of 2012, E I Du Pont De Nemours And Co (NYSE:DD)’s management sees increased operating expenses and a continued challenge in segments of its business because of ongoing weakness in the world economy. I am not too excited about this company as an investment opportunity. This is a case in point of the philosophy that a good company and a good stock are not always the same thing. Take a look at the price chart below. Even with the recent uptrend it remains to be seen if this indicates a change in trend that leads to an increased demand for shares of E I Du Pont De Nemours And Co (NYSE:DD).
Next in line is another large chemical company stock, The Dow Chemical Company (NYSE:DOW). The weighting to The Dow Chemical Company (NYSE:DOW) is approximately 8.6% of the iShares Dow Jones US Basic Materials ETF. See the chart below.
This is another example of a disconnection between stock price performance and good earnings and related developments. The first quarter of 2013 was filled with positive comments, such as increased earnings per share, from period-to-period, of $0.46 per share versus $0.35 per share. Cash flow from operations increased by nearly $500 million, and debt-reduction programs have removed $901 million from the books. Yet these factors have yet to stimulate the investing public to buy the shares.