Materials Mavens: Sector ETFs To Embrace
Underscoring this year's renaissance in cyclical sectors, the Materials Select Sector SPDR (NYSE: XLB) is up more than 15 percent, a showing that is good for third among the sector SPDR exchange-traded funds. The two SPDRs outpacing XLB this year are cyclical funds, those tracking the energy and industrial sectors.
Commodities And Materials
Commodities are seen as sensitive to U.S. interest rates, but the materials sector is not as inversely correlated to rates as, say, telecom or utilities. As a cyclical sector, materials can actually perform well if the Federal Reserve raises interest rates because that would be a sign the Fed is confident the economy is strong enough to endure higher borrowing costs.
Some analysts are increasingly bullish on the materials sector.
“CFRA’s Investment Policy Committee raised its weighting on the materials sector to Overweight from Marketweight last week. Sam Stovall, CFRA’s Chief Investment Strategist, noted that we project this mid-to-late economic cycle outperformer to record above-market EPS growth in 2017, assisted by a recovery in commodity prices from their drawn-out decline. He also thinks the group will benefit from the expected pickup in U.S. infrastructure spending under the new Republican administration,” said CFRA Research in a note out Tuesday.
XLB is home to $3.57 billion in assets under management, making it the largest materials ETF on the market. The fund holds 28 stocks, but its lineup is top heavy as Dow component E I Du Pont De Nemours And Co (NYSE: DD), Dow Chemical Co (NYSE: DOW) and agribusiness giant Monsanto Company (NYSE: MON) combine for nearly 31 percent of the ETF's weight.
Chemicals makers represent over 71 percent of XLB's weight, which could be a positive going forward.
“Christopher Muir, a CFRA equity analyst, has a positive fundamental outlook for the diversified chemicals sub-industry, the largest in the S&P 500 materials sector. Muir believes that the business environment for the chemical industry will remain healthy and that the chemical manufacturing sector will continue to expand. Equity analyst Matt Miller raised his fundamental outlook to positive on the steel industry in November in part due to Trump’s discussion in the campaign to significantly increasing tariffs on imported steel from China,” said CFRA.
The SPDR S&P Metals & Mining (ETF) (NYSE: XME), which has more than doubled in value this year, allocates over 58 percent of its weight to steel stocks. Previously high-flying precious metals miners are 15 percent of XME's lineup.
CFRA has a Market-Weight rating on XME and an Overweight rating on XLB.
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