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Meet 2013’s Top Materials ETF


It has been a decent year for the materials sector, though not one that will go down in the record books as being particularly jaw-dropping.

With just a few trading days left in 2013, the Materials Select Sector SPDR (XLB) and the Vanguard Materials ETF (VAW) , two large-cap focused funds, have an average year-to-date, S&P 500-lagging gain of 24.5%.

Investors that have taken on the added risk and volatility that comes along with small-caps in a cyclical sector such as materials have rewarded by the PowerShares S&P SmallCap Materials Portfolio (PSCM) . The often overlooked $21 million PSCM, which is is based on the S&P SmallCap 600 Capped Materials Index, has returned nearly 30% this year. [Embrace These Cyclical ETFs in December]

Like the other PowerShares small-cap sector funds, PSCM was created to be the small-cap answer to large-cap focused ETFs such as the aforementioned XLB and VAW. PSCM joins the PowerShares S&P SmallCap Consumer Staples Portfolio (PSCC) as being one of those small-cap ETFs that is the best in its respective sector this year. [This is 2013's Best Consumer Staples ETF]

Although PSCM is a play on small-cap materials names, a group often thought to be highly speculative, the average market value of the fund’s 40 holdings is $1.34 billion, proving this fund is far from being penny stock-heavy. Nearly 47% of PSCM’s weight is allocated to growth names with the remainder tilted to small-cap value stocks, according to PowerShares data.

PSCM’s top-five holdings – PolyOne (POL), HB Fuller (NYSE:HB), KapStone Paper (KS), Balchem (BCPC) and Schweitzer-Maudit (SWM) – combine for about 28% of the ETF’s weight. After a fee reduction announced earlier this year, PSCM charges 0.29% per year.

Although PSCM tracks small-caps in high-beta cyclical sector, traits that could be seen as a sign of higher valuations, the ETF has a P/E ratio of 25.83 and a price-to-book ratio of just over two. Those numbers compare favorably with the P/E of 29.6 and the price-to-book ratio of almost 4.3 on the iShares Russell 2000 ETF (IWM) .

PSCM has recently been in rally mode, gaining over 10% in the past three month. On Monday, the ETF touched an all-time high on volume that was more than double the daily average.

PowerShares S&P SmallCap Materials Portfolio


Tom Lydon’s clients own shares of IWM.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.