The Basic Materials sector is sensitive to changes in the business cycle. As demand for basic materials stems from the construction industry and companies requiring raw materials to then produce their final product, the supply of basic materials weighs heavily on a strong economy. In a growing, expanding economy, investment is made in infrastructure where the demand for basic materials is high. This drives the price of the raw materials up, which in turn increases the price of the companies held within this ETF, making the ETF overall a more valuable option.
However the reverse is also true and if a economy is receding and is not building or producing on a continuous and reliable scale, then this is not a good signal for the ETF. The overall health of the macroeconomic environment is a key driving force in this industry.
Another influence on this particular ETF is global expansion, which is driven by the emerging markets. This expansion is being driven by the increased appetite for resources from China and India. China’s booming economy is a driving force behind the unprecedented global demand for basic commodities.