Market Overview

Merger Boosts Materials ETFs

Merger Boosts Materials ETFs

The chemicals sector has been consolidating of late, and M&A can mean a premium for shareholders.

In September Germany-based Merck KGaA announced its purchase of Sigma-Aldrich Castello Di Borghese (NASDAQ: SIAL) for $17 billion in cash, a 37 percent premium to SIAL’s closing price pre-announcement. SIAL is a manufacturer of chemicals and laboratory kits used in scientific research.

While this consolidation trend may continue, it is very difficult to attempt to pick the specific stocks that will be taken over. A lower risk strategy is to invest in the chemicals sector through an ETF.

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Two ETFs concentrate on the materials sector, but analyzing their portfolios shows that the majority of the stocks are in the chemicals sector.

Vanguard Materials ETF (NYSE: VAW)

VAW seeks to track the performance of a benchmark index that measures the returns of publicly traded companies in the materials sector. It consists of 132 companies, but the top ten holdings make up just under 50 percent of the entire ETF.

The top holdings include The Dow Chemical Company, E I Du Pont De Nemours And Co, and Monsanto Company. Approximately two-thirds of the ETF is invested in chemical stocks.

VAW is up 19 percent of the last 12 months, and up 7 percent over the last six months. VAW has an expense ratio of 0.14 percent, beating most of its competitors.

Materials Select Sector SPDR (NYSE: XLB)

XLB follows 32 publicly traded companies in the materials sector. The portfolio is distributed across five subsectors. The top two are chemicals, at 74 percent, and metals and mining at 13 percent.

XLB has the same top holdings as VAW but in a different order; du Pont is the top holding, followed by Monsanto and Dow Chemical. XLB has performed well, up 20 percent over the last 12 months, and 7 percent over the last six months. XLB boasts a favorable 0.16 percent expense ratio.

Both ETFs are a play on more potential mergers in the chemical sector and also offer exposure to companies that should do well during the continued stock market rally and global economic rebound.


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