Tag Archives: materials

Best And Worst Q1’16: Materials ETFs, Mutual Funds And Key Holdings

The Materials sector ranks fourth out of the ten sectors as detailed in our Q1’16 Sector Ratings for ETFs and Mutual Funds report. Last quarter , the Materials sector ranked seventh. It gets our Neutral rating, which is based on aggregation of ratings of nine ETFs and 15 mutual funds in the Materials sector. See a recap of our Q4’15 Sector Ratings here . Figure 1 ranks from best to worst the eight Materials ETFs that meet our liquidity standards and Figure 2 shows the five best and worst-rated Materials mutual funds. Not all Materials sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 26 to 121). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Materials sector should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2. Figure 1: ETFs with the Best & Worst Ratings – Top 5 Click to enlarge * Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The Fidelity MSCI Materials Index ETF (NYSEARCA: FMAT ) is excluded from Figure 1 because its total net assets are below $100 million and do not meet our liquidity minimums. Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5 Click to enlarge * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The iShares U.S. Basic Materials ETF (NYSEARCA: IYM ) is the top-rated Materials ETF and the Fidelity Select Materials Portfolio (MUTF: FMFEX ) is the top-rated Materials mutual fund. Both earn an Attractive rating. PowerShares S&P SmallCap Materials Portfolio (NASDAQ: PSCM ) is the worst-rated Materials ETF and the Rydex Basic Materials Fund (MUTF: RYBMX ) is the worst-rated Materials mutual fund. PSCM earns a Dangerous rating and RYBMX earns a Very Dangerous rating. 161 stocks of the 3000+ we cover are classified as Materials stocks. Monsanto Company (NYSE: MON ) is one of our favorite stocks held by IYM and earns an Attractive rating. Over the past decade, Monsanto has grown after-tax profit ( NOPAT ) by 16% compounded annually. Over this same time, the company has improved its return on invested capital ( ROIC ) from 7% to 14%. Despite the long-term profitability of the company, shares remain undervalued. At its current price of $88/share, Monsanto has a price to economic book value ( PEBV ) ratio of 1.1. This ratio means the market expects Monsanto’s profits to grow by only 10% over its remaining corporate life. If Monsanto can grow NOPAT by just 5% (under a third of historical rate) compounded annually for the next decade , shares are worth $140/share today – a 59% upside. Vulcan Materials (NYSE: VMC ) is one of our least favorite stocks held by Materials ETFs and mutual funds and earns a Dangerous rating. Vulcan Materials business has yet to recover from the global recession in 2008. Since 2007, the company’s economic earnings have fallen from -$88 million to -$463 million on a trailing twelve months basis. Over this same time, its ROIC has declined from 8% to a bottom quintile 3%. Despite the deterioration of the business, the stock trades at the same prices it did prior to the recession, which leaves it significantly overvalued. To justify its current price of $82/share, Vulcan must grow profits by 14% compounded annually for the next 25 years . This expectation is awfully optimistic given that since 1998, Vulcan’s NOPAT has actually declined by 1% compounded annually. Figures 3 and 4 show the rating landscape of all Materials ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst ETFs Click to enlarge Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Mutual Funds Click to enlarge Sources: New Constructs, LLC and company filings D isclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector or theme. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

An Analysis Of 5 Materials ETFs

Summary These ETFs allow investors to obtain exposure to companies that provide a variety of inputs and raw materials essential to global economic function. As a whole, materials ETFs are more volatile and yield less than the S&P 500, but exceptions can be found. These funds offer varying risk and composition profiles that can be appropriate for a wide range of investors. Profiling the contenders (unless otherwise stated, market prices, NAV and SEC yield as of 1/29/15) : Vanguard Materials ETF (NYSEARCA: VAW ) This ETF seeks to track the performance of a benchmark index that measures the investment return of stocks in the materials sector and includes stocks of companies that extract or process raw materials. Market price: $104.73 30-day SEC Yield: 1.88% Number of holdings at 12/31/14: 128 iShares U.S. Basic Materials ETF (NYSEARCA: IYM ) This ETF seeks to track the investment results of an index composed of U.S. equities in the basic materials sector. It offers exposure to U.S. companies involved with the production of raw materials including metals, chemicals, and forestry products. Market price: $79.97 30-day SEC Yield: 1.67% Number of holdings at 01/28/15: 58 Guggenheim S&P 500 Equal Weight Materials ETF (NYSEARCA: RTM ) This ETF seeks to replicate as closely as possible, before fees and expenses, the performance of the S&P 500 Equal Weight Index Materials. Market price: $83.16 30-day SEC Yield: 1.45% Number of holdings at 01/29/15: 29 Materials Select Sector SPDR ETF (NYSEARCA: XLB ) This ETF seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the S&P Materials Select Sector Index. Market price $47.88 30-day SEC Yield: 2.00% Number of holdings at 01/28/15: 31 Powershares DW A Basic Materials Momentum ETF (NYSEARCA: PYZ ) This ETF seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the S&P Materials Select Sector Index. Market price $51.56 30-day SEC Yield: 1.06% Number of holdings at 01/28/15: 41 1) Diversification Diversification is the process of reducing non-systematic risk by investing in a variety of assets or asset classes that (hopefully) do not move up or down in value at the same time or magnitude. For the purposes of analyzing materials ETFs, I will look at both the number of holdings and also the industry diversification of constituents. a) Number of holdings An ETF does not need to hold every company of every sector that comprises its benchmark index, but 2 – 3 companies per industry is my subjective minimum to achieve adequate diversification. The basic materials sector can be broken up into roughly 20 industries including: agricultural chemicals, aluminum, chemicals – major diversified, copper, gold, independent oil & gas, industrial metals & minerals, major integrated oil & gas, nonmetallic mineral mining, oil & gas drilling & exploration, oil & gas equipment/services, oil & gas pipelines, oil & gas refining & marketing, silver, specialty chemicals, steel & iron, and synthetics. (click to enlarge) Winner: Vanguard. While some sub-sectors in the basic materials universe move in tandem, (think Oil and Gas drilling and Oil and gas marketing/refining both benefit from higher oil prices), other industries do not. Vanguard’s 128 holdings double its next closest competitor giving it the best shot at reducing non-systematic risk to an acceptably low level. b) Industry concentration Vanguard Materials ETF Courtesy of Vanguard iShares U.S. Basic Materials ETF Courtesy of BlackRock Guggenheim S&P 500 Equal Weight Materials ETF (click to enlarge) Courtesy of Guggenheim Investments Materials Select Sector SPDR ETF Courtesy of State Street Powershares DW A Basic Materials Momentum ETF Courtesy of Invesco Winner: Guggenheim. While Vanguard appears to be the most diversified with no component making up more than 25%, a closer look at captions reveals it is nearly 60% chemicals (just broken into various subcategories). Guggenheim is more balanced with three industries making up 10% or more of total weighting and while it is still heavy on chemicals, its overall chemical concentration is the lowest. 2) Expense ratio Expense ratio is the total of a funds operating expenses, expressed as percentage of average net assets. These expenses include management fees, Distribution/service or “12b-1” fees, custodial, legal, accounting, etc. Lower expense ratios, either through larger ETF size or smaller nominal expenses means higher investment returns. (click to enlarge) Winner: Vanguard, and everyone else. According to Morningstar , the average expense ratio for similar funds was 1.47%. Keeping fees and transaction costs as low as possible is something investors should always keep on the forefront of their mind. 3) Total return (click to enlarge) Winner: Powershares. I am always mentally benchmarking indexes and companies based on how they fared through and since the financial crisis. To look at that, you need to include several years before 2008. Powershares Basic Materials ETF was established in 2006, and its 3, 5 and (almost) 10 year returns (including the 2008 ordeal) are essentially on track with the S&P. That is saying something for a relatively narrowly focused ETF. 4) Valuation multiples (click to enlarge) Winner: SPDR. The SPDR ETF is trading at a discount to the S&P 500 (19.71) on a price to earnings basis. Honorable mention, iShares and Powershares whose earnings are also cheaper than those of the S&P 500. 5) Liquidity The ability to get out of a great investment is just as important as the ability to get in. While ETFs are generally regarded as having higher liquidity than mutual funds (primarily because they can be traded throughout the day, rather than just at the end), there are reasons to avoid ETFs with excessively low volume. Chief among these are higher bid-ask spreads, which may result in the inability to profitably execute a short-term trade (not a real issue for long-term investors). However, one of the issues that arises from low liquidity (a deviation between price and NAV) can actually be an opportunity. If an ETF is trading slightly below its NAV, but the market is not active enough for it to quickly resume equilibrium, you can shave a few points off your basis by looking for opportune entry points. (click to enlarge) Winner: SPDR. Higher volume means tighter bid-ask spreads, full stop. 6) Yield (click to enlarge) Winner: SPDR. SPDR is the only ETF that has a 30 day SEC yield greater than the S&P 500. The 30-day SEC yield is an annualized yield formula mandated by the Securities and Exchange Commission that is based on projected dividend yield of the fund’s holdings over a trailing 30 day period. 7) Volatility (click to enlarge) Winner: SPDR. This ETF exhibited lower volatility than all of its competitors over a three-year time frame and all but Guggenhem over five years. 8) Dividend history and growth (click to enlarge) Winner: Guggenheim. While it had a big drop off in distributions from 2010 – 2011, it has increased total distributions every year since then. Note for consideration, all of these funds pay quarterly distributions except for Vanguard, which pays annually. So, which Materials ETF should you own? SPDR! The Materials Select Sector ETF by SPDR is: the most active (liquid), the least volatile, offers the highest yield, the second lowest expense ratio, and trades at the lowest multiple of earnings. A word of caution Materials ETFs lagged the market as a whole in 2014. While last year’s losers can become this year’s winners, that is not always the case. A strong dollar can hurt the materials sector as it makes purchases of materials sector goods by foreign companies more expensive. Do your homework, review the composition and risk profile of each of these ETFs and monitor your holdings. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.