What Lies Ahead for Materials ETFs?

The materials sector is attracting a lot of investor attention lately. Industrial Metals have been rebounding on greater global optimism. This is primarily due to robust global growth cues and strong demand. Manufacturing has been gathering pace globally and driving demand for metals.

However, the scenario in the United States and among its trade partners is not that sweet right now. U.S. Commerce secretary Wilbur Ross stated last week that the administration has got the green light to move ahead with proposed tariffs on metals and that President Donald Trump has until April to decide the future course of action around his protectionist agenda (read: Stave Off Rising Rates Anxiety With These ETFs & Stocks).

Into the Headlines

Ross recommended a possible global tariff of at least 24% on imports of steel and 7.7% on aluminium after careful consideration of all factors including import surges in recent years. Ross added that the current scenario threatens to impair the U.S. national security.  

Per a Financial Times article, Wang Hejun, an official at China’s commerce ministry, said, “The spectrum of national security is very broad and without a clear definition it could easily be abused,” adding, “If the final decision from the US hurts China’s interests, we will certainly take necessary measures to protect our legitimate rights.”

American companies have for long criticized Chinese practices, as they complain that Chinese companies dump their products at below market prices, thanks to the state subsidy they receive.

As a result, Trump is expected to take a strict stand against this move, because he has been following his ‘America first’ agenda since his first day in office. Per a Financial Times article, in a meeting with Congress members, Trump said, “I want to keep prices down but I also want to make sure that we have a steel industry and an aluminium industry and we do need that for national defence,” adding, “If we ever have a conflict we don’t want to be buying steel [from] a country we are fighting.”

If Trump moves ahead with his agenda, China in retaliation will need to carefully administer its moves, so as to not hurt its export dependent economy.

Infrastructure

Moving on to Trump’s infrastructure plans, the President unveiled his $1.5 trillion plan last week. However, a mere $200 billion of that will come from direct federal spending, whereas the rest is to be funded by state and local governments who are expected to match any federal allocation by at least a four-to-one ratio (read: Will Infrastructure ETFs Get a Boost from Trump's Plan?).

Although the plan is still in its early stages, if passed, it will significantly benefit materials companies. "For too long, lawmakers have invested in infrastructure inefficiently, ignored critical needs, and allowed it to deteriorate. As a result, the United States has fallen further and further behind other countries," Trump's message to the Congress read. "It is time to give Americans the working, modern infrastructure they deserve," he added.

Let us now discuss two ETFs focused on providing exposure to the sector.

Materials Select Sector SPDR ETF XLB

This fund seeks to provide exposure to materials stocks and tracks the Materials Select Sector Index. It has AUM of $5.2 billion and charges a moderate fee of 13 basis points a year.

From a sector look, the fund has high exposure to Chemicals, Containers & Packaging and Metals & Mining, with 72.4%, 12.9% and 10.0% exposure, respectively (as of Dec 31, 2018). The fund’s top three holdings are DowDuPont Inc. DWDP, Monsanto Co. MON and Praxair Inc PX with 23.2%, 7.8% and 6.5% allocation, respectively (as of Feb 16, 2018).  The fund has returned 17.4% in a year. XLB has a Zacks ETF Rank #2 (Buy), with a Medium risk outlook.

iShares U.S. Basic Materials ETF IYM

This fund seeks to provide exposure to materials stocks and tracks the Dow Jones U.S. Basic Materials Index. It has AUM of $916.9 million and charges a fee of 44 basis points a year.

From a sector look, the fund has high exposure to Diversified Chemicals, Specialty Chemicals and Fertilizers & Agricultural Chemicals, with 28.5%, 21.1% and 12.4% exposure, respectively (as of Feb 16, 2018). The fund’s top three holdings are DowDuPont Inc., Monsanto Co. and Praxair Inc with 24.2%, 7.6% and 6.3% allocation, respectively (as of Feb 16, 2018). The fund has returned 17.2% in a year. IYM has a Zacks ETF Rank #2, with a High risk outlook.

Vanguard Materials ETF VAW

This fund seeks to provide exposure to materials stocks and tracks the MSCI US Investable Market Materials 25/50 Index. It has AUM of $2.5 billion and charges a fee of 10 basis points a year.

From a sector look, the fund has high exposure to Diversified Chemicals, Specialty Chemicals and Fertilizers & Agricultural Chemicals, with 20.8%, 21.1% and 9.1% exposure, respectively (as of Jan 31, 2018). The fund’s top three holdings are DowDuPont Inc., Monsanto Co. and Praxair Inc with 17.9%, 5.4% and 4.7% allocation, respectively (as of Jan 31, 2018). The fund has returned 16.1% in a year. IYM has a Zacks ETF Rank #2, with a Medium risk outlook.

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Praxair, Inc. (PX) : Free Stock Analysis Report
 
SPDR-MATLS SELS (XLB): ETF Research Reports
 
VIPERS-MATERIAL (VAW): ETF Research Reports
 
ISHARS-US BA MA (IYM): ETF Research Reports
 
Monsanto Company (MON) : Free Stock Analysis Report
 
Dow Chemical Company (The) (DWDP) : Free Stock Analysis Report
 
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