Basic Materials ETF Delivers Not-So-Basic Returns

Cinthia Murphy, Managing Editor for

Basic materials ETFs have enjoyed a good run-up in the past month thanks largely to expectations of rate cuts ahead.

The Materials Select Sector SPDR Fund (XLB)—the largest materials ETF and most liquid—rallied about 4.5% in the period, making it the best-performing S&P 500 sector ETF in the last 30 days.

Basic materials is filled with chemicals, packaging and steel companies, to name a few. It’s a segment that requires a lot of capital to operate, and one that relies heavily on exports. Lower interest rates would cut the cost of money for these companies, and put pressure on the value of the U.S. dollar, making U.S. exports more attractive. Even as trade wars rage on, the materials sector is finding upside on hopes of lower rates.

XLB saw its total assets under management grow about 20% since June 1 as investors poured $700 million into the fund. Investing in 29 materials companies, including chemicals and packaging manufacturers picked from the S&P 500 universe, XLB has $4.2 billion in total assets and trades on average $373 million a day at narrow spreads averaging 0.02%.

With a price tag of only 0.13%—one of the lowest in the segment—the fund is a trader darling and is widely used in sector rotation strategies.

While XLB has led the pack in recent weeks with strong net creations, it’s not the only ETF investors can use to access the materials sector.

Another giant in the space is the Vanguard Materials ETF (VAW). VAW owns about 120 securities from the MSCI universe, lowering concentration among top holdings. The fund, which comes with the cheapest price tag in this segment of 0.10%, has $2 billion in total assets.

In the past month, concentration seems to be boding well for XLB, which has outperformed VAW—both are outperforming the S&P 500:

XLB, VAW, SPY chart

Source: StockCharts as of June 17

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