Material Men: Materials ETFs Beating Broader Market

ETF Trends

It is the third-smallest sector in the S&P 500, but in a sign of late-cycle behavior, the group has been strong against broader indices this year.

The Materials Select Sector SPDR (XLB) is up 1.8% year-to-date, a middling performance among the nine sector SPDR ETFs, but one that is also easily superior to those offered by the S&P 500 and the Dow Jones Industrial Average. The Vanguard Materials ETF (VAW) and the iShares U.S. Basic Materials ETF (IYM) have kept pace with XLB. [A Sector ETF Rotation Strategy]

Investors have taken notice of the strength in the materials sector. Last month, materials ETFs, including gold mining funds and other industry funds, raked in almost $900 million in new assets. XLB has brought in over $187 million since the start of March. [Slow First Quarter for ETF Inflows]

Chemicals stocks have been key drivers of the recent upside accrued by materials ETFs. Less than half of the 30 stocks in the Dow Jones Industrial Average are up year-to-date, but one that is DuPont (DD). Dupont rival Dow Chemical (DOW) is up 8.4% this year while shares of LyondellBasell Industries are higher by 13.4%.

Those stocks have helped XLB, VAW and friends fight off weakness in Monsanto (MON). And with no chemicals-specific ETF on the market, investors looking to access the industry via an ETF are forced to turn funds like XLB and VAW. Dupont, Dow and LyondellBasell combine for almost 28% of XLB’s weight, according to State Street data.

The cautionary tale with the materials sector is expected earnings growth or lack thereof. “The Materials sector has witnessed the largest dip in expected earnings growth (to -2.1% from 8.7%) since the start of the quarter. Companies in the Metals & Mining industry have seen major reductions to EPS estimates during this time,” according to FactSet data.

In the six years ending 2013, XLB only outperformed the S&P 500 twice – in 2009 and 2010. At the fundamental level, materials stocks are a tad pricy compared to the S&P 500. On a relative basis, the materials sector is trading above its long-term price-to-earnings, price-to-book and price-to-operating cash flow ratios.

Materials Select Sector

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