Some sectors are not suitable for all investors. The materials sector, the smallest weight in the sector S & P 500 Index at only 2.73%, is one of these groups. But the size of materials in the S & P 500 and other references does not pose a problem. Materials are more of a cyclical sector, which means that its volatility may be more comparable to other cyclical groups, such as energy and industries.
Commodity stocks often show correlations with commodity prices, making the sector vulnerable to fluctuations in the dollar and the global economic cycle. In simple terms, the materials sector is not a defensive sector.
In addition, it is unlikely that the materials sector will withstand more general declines in the market. If anything, the sector is likely to achieve worst than the broader market in bearish environments. While the broader benchmarks slipped last year, the Material Selection Index fell nearly 15% for the year, more than triple the 2018 loss incurred by the S & P 500.
For the more adventurous and risk-tolerant, exchange-traded funds (ETFs) could be the way to choose stocks in the materials sector. Here are some of the best materials in which ETFs can invest if the sector rebounds.
Selected Materials Sector SPDR (XLB)
Expenditure ratio: 0.13% per year, or $ 13 on an investment of $ 10,000.
the Materials Select SPDR sector (NYSEArca:XLB) follows the aforementioned material selection sector index and is the largest materials ETF in the United States
XLB, which is more than 20 years old, "seeks to provide accurate exposure to companies in the chemicals, building materials, containers and packaging, metals and mining, paper and forest products sectors," according to State Street.
As a capitalization-weighted ETF overseeing a relatively small sector, this materials ETF is subject to concentration risk. Just two actions – DowDuPont Inc. (NYSE:DWDP) and Linde Plc (NYSE:LINEN) – combine for more than 36% of the XLB list. Overall, this ETF Materials holds 25 shares.
Fidelity MSCI Materials ETF (FMAT)
Expenditure ratio: 0.084% per year
Fidelity, an increasingly common tradition of being a low-cost leader, the Fidelity MSCI Materials ETF (NYSEArca:MTAF) is the ETF of the cheapest materials on the market. Like XLB, FMAT is a weight-weighted ETF.
This does not mean that the returns generated by these two rivals will be reflected. FMAT holds close to 120 shares, which gives it a much broader offering than XLB, which means that these hardware ETFs generally offer variable returns from one year to the next. This is the case in 2018, when FMAT slipped 17.40%, 250 points less than the performance of XLB.
Like its competitor XLB, FMAT performs very well, allocating more than 37% of its total weight to DowDuPont and Linde.
Invesco S & P 500 Equal Weight ETF (RTM)
Expenditure ratio: 0.40% per year
For investors seeking to mitigate the risk associated with a single stock often associated with the materials sector, Invesco S & P 500 ETF with equivalent weight (NYSEArca:RTM) is the material to be taken into account by the ETF.
In any industry, the equal weight ETFs generally have a lower average market value than the holdings underlying the market capitalization weighted funds. The average market capitalization of the 25 holdings of RTM amounts to $ 25.69 billion, compared with $ 48.33 billion for XLB's holdings. Despite the penchant for small businesses, this trait does not guarantee that RTM will perform worse than its market capitalization-weighted competitors when the materials sector slips. Last year, RTM performed slightly worse than market-weighted XLB and FMAT.
RTM also has a sense of value, as more than 51% of the assets of this fund are classified as valuable shares. None of the RTM holdings has a weighting greater than 4.30%.
SPDR S & P Metals and Mining ETF (XME)
Expenditure ratio: 0.35% per year
the SPDR S & P Metals & Mining ETF (NYSEArca:XME) is a more tactical ETF, offering investors the potential for greater rewards – and greater risk – than competing materials ETFs.
With $ 512 million in assets under management, XME "seeks to provide exposure to the metals and mining sector of the S & P TMI, which includes the following sub-industries: aluminum, coal and consumable fuels, copper, diversified metals and mines, gold, precious metals and minerals, silver and steel, "according to State Street.
XME is also an equally weighted ETF and its 29 smallest market capitalization holdings, as evidenced by an average market value of $ 4.64 billion. This material ETF is heavily allocated to steel, coal and aluminum producers.
These are unstable sectors of the materials sector, which means that XME can not stand the simultaneous weakness of these industries. XME's vulnerabilities to the weakness of these segments were exposed last year when material ETFs lost nearly 27%.
First Trust AlphaDEX Materials Trust Fund (FXZ)
Expenditure ratio: 0.64% per year
Beyond the equal weight ETFs highlighted here, there are other smart beta approaches for this sector. the Alpha Trust Materials First Trust Fund (NYSEArca:FXZ) is one of these funds. FXZ follows the StrataQuant Materials Index.
This index targets Russell 1000-based stock names based on growth factors including price appreciation at 3, 6 and 12 months, selling price growth and growth in sales. One year and, separately, on value factors including the book value of the price, cash flow price and return on assets, "according to First Trust.
FXZ's weighting system is undoubtedly unique in comparison to other materials ETFs, and its annual commission is undoubtedly high relative to the category average. None of these features mean that FXZ is a "good" ETF, as shown by the 22.60% decline in the fund in 2018.
FXZ holds 51 shares with a median market value of $ 6.89 billion and these ETFs trade at significant discounts to the general market, as evidenced by a slightly higher P / E ratio.
Todd Shriber does not own any of the above titles.