Materials ETFs Head To Head: XLB Vs. IYM

The materials sector is garnering 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 picking up pace globally and driving demand for metals.

Cause for Appeal

On Oct 19, the Senate passed a budget of $4 trillion in a 51-49 vote, which will allow the Republicans to move ahead with the tax cuts with a simple majority instead of the 60-vote supermajority that is generally required. Moreover, this has increased investor optimism about President Donald Trump delivering on his promises of greater infrastructure spending, which is expected to give a boost to the materials sector.

Per the Commerce Department, construction spending increased 0.3% in September on a monthly basis to $1.22 trillion. It grew 2% on a year-over-year basis.

Moreover, strong earnings performance has contributed to gains in the sector. U.S. economic fundamentals seem to be strong. GDP increased 3% annually in the July-September period compared with a 3.1% increase in the third quarter.

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

Materials Select Sector SPDR ETF (XLB – Free Report)

This fund seeks to provide exposure to materials stocks and tracks the Materials Select Sector Index. It has AUM of $4.4 billion and charges a moderate fee of 14 basis points a year. It has 25 holdings and bears significant concentration risk as over 68.7% of the assets are allocated to the top 10 holdings.

From a sector look, the fund has high exposure to Chemicals, Containers & Packaging and Metals & Mining, with 72.9%, 13.2%, and 9.2% exposure, respectively (as of Sep 30, 2017). The fund’s top three holdings are DowDuPont Inc. (DWDP – Free Report), Monsanto Co. (MON – Free Report) and Praxair Inc (PX – Free Report) with 22.9%, 8.0%, and 6.5% allocation, respectively (as of Nov 7, 2017).  The fund has returned 26.4% in a year and 18.0% year to date (as of Nov 7, 2017). XLB has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.