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Rohm & Haas, Dow Chemical Funds to Avoid

Kevin Baker

As the funding that Dow Chemical (DOW Quote) was counting on to acquire Rohm & Haas(ROH Quote) disappeared Monday, shares of both Dow Chemical and Rohm & Haas tumbled Monday.

Low oil prices and the potential for further commodity deflation prompted the Kuwait government to rethink the valuations on its upcoming investments and to walk away from its planned joint venture with Dow Chemical. Without the $9 billion Kuwaiti investment in Dow's plastics unit, Dow may not be able to raise the necessary funds to complete the deal.

Let's say that does happen. Transaction breakup fees may run as high as $600 to $750 million -- paid by either Dow Chemical or Rohm & Haas, depending of which side is forced to cancel the agreement. Further losses could have the secondary effect on the funds holding shares of these companies.

Six exchange-traded funds targeted at the materials sector have large exposures to both companies. Rated at E+ by TheStreet.com Ratings, PowerShares FTSE RAFI Basic Materials Sector Portfolio (PRFM Quote) has the highest concentration of holdings of the stocks, with 14.9% of the fund invested in Dow and 5.0% in Rohm.

Other ETFs in this group include iShares Dow Jones U.S. Basic Materials Sector Index Fund (IYM Quote), Materials Select Sector SPDR Trust (XLB Quote) and Vanguard Materials ETF (VAW Quote). All three are rated C.

The Rydex S&P Equal Weight Materials ETF (RTM Quote) earned a D- rating with its structure of holding just as much Rohm & Haas and Dow Chemical, as a percentage of net investments, as any other holding in its portfolio. Adding high volatility from 200% leverage to sizable losses scored the Ultra Basic Materials ProShares (UYM Quote) a rating of E+.

Two open-end funds heavily invested in this sector are the ProFunds Basic Materials UltraSector ProFund (BMPIX Quote), E-, and the Fidelity Select Chemicals Portfolio (FSCHX Quote), C+.

For more information, check out an explanation of our ratings.