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3 Reasons to Remember Materials ETFs

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The materials sector is one of the smallest sectors in the S&P 500 and as such, the group often goes overlooked. However, there are reasons for investors to give the Materials Select Sector SPDR (NYSEArca: XLB), the largest exchange traded fund dedicated to that sector, and related ETFs another look.

Due to their close ties with the commodities market, materials stocks and ETFs are susceptible to cyclical demand and volatility in raw material and energy prices. While the sector’s sensitivity to business cycles can expose investors to greater risks, the area may also offer attractive returns during periods of strong growth.

XLB is up 14.51% year-to-date and the fund could deliver more upside as investors warm to opportunities with chemicals manufacturers.

The $4.15 billion XLB “seeks to provide precise exposure to companies in the chemical, construction material, containers and packaging, metals and mining, and paper and forest products industries,” according to State Street.

Chemicals Call

“Nomura analyst Aleksey Yefremov upgraded his outlook on chemical stocks Monday, even as the sector remains strong despite lingering economic concerns,” reports Al Root for Barron’s.

XLB, which holds 26 stocks, allocates 76.64% to chemicals makers, according to issuer data.

“Yefremov believes margins are headed higher, and that shares of Dow (ticker: DOW), LyondellBasell Industries (LYB), and Huntsman (HUN) are most likely to benefit,” according to Barron’s.

The newly formed Dow Inc. and LyondellBasell Industries are XLB’s fourth- and sixth-largest holdings, respectively, combining for over 11% of the fund’s weight.

“About 54% of analysts covering large chemicals companies rate the shares at Buy. That’s about the same ratio as for other large-capitalization U.S. stocks,” reports Barron’s.

Investors have pulled $30.66 million from XLB this year.

Rivals to XLB include the Fidelity MSCI Materials Index ETF (NYSEArca: FMAT) and the Vanguard Materials ETF (NYSEArca: VAW).

For more information on the materials sector, visit our materials category.

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