Investing in a Material World

12/09/2019 5:00 am EST

Focus: ETFS

Todd Rosenbluth

Senior Director of ETF & Mutual Fund Research, CFRA Research

Materials Select Sector SPDR (XLB) is a low-cost choice to track a sector that is entering a 6-month period of historic outperformance, explains analyst and fund expert Todd Rosenbluth, in CFRA Research's The Outlook.

The November-through-April six-month period has historically been a strong one for the S&P 500 Index, rising 6.6% on average since 1994, according CFRA Research, ahead of the 4.1% average in all six-month periods.

According to Sam Stovall, Chief Investment Strategist at CFRA, the S&P 500 Materials sector advanced 9.3% on average during the seasonally strong six-month period and outperformed the broader S&P 500 Index 69% of the time.

XLB is the largest diversified ETF for the Materials sector and holds S&P 500 constituents based on market capitalization. The fund is relatively concentrated with 65% of assets in its top-10 holdings; moreover, seven of them are CFRA Buy or Strong Buy recommendations, which supports our positive rating on XLB.

One such holding is Dow (DOW), which CFRA Equity Analyst Christopher Muir thinks will experience improving fundamentals in 2020, marked by strengthening operating rates, higher volumes and prices as well as cost savings. DOW has cost advantaged chemical production that reduces short-term volumetric risks related to competition, while remaining profitable, according to Muir.

Commodity chemical producer LyondellBasell Industries (LYB) is the sole 5-STARS stock in the ETF’s top 10, after Muir upgraded the stock on November 12th.

Another top position viewed attractively by CFRA’s equity research team is Newmont GoldCorp (NEM). CFRA Equity Analyst Matt Miller, thinks synergy potential from recent deals — acquiring Goldcorp and forming a joint venture with Barrick Gold — will be a catalyst.

Industry consolidation will likely decrease operating costs and, given CFRA’s view of an appreciating gold price in the next 18 months, Miller thinks the risk-to-reward profile for NEM is compelling.

DuPont de Nemours (DD), Sherwin-Williams (SHW), Air Products and Chemicals (APD) and PPG Industries (PPG) are other large positions that are CFRA Buy recommended.

In addition, six of the fund’s top-10 holdings earn a favorable S&P Global Market Intelligence Quality Ranking of A- or higher for their consistent dividend and earnings records over the past 10 years, including Linde (LIN), Ecolab (ECL) and Ball Corp. (BLL).

Further supporting CFRA Research’s rating on Materials Select Sector SPDR are the fund’s low costs. XLB incurs a modest 0.13% expense ratio and trades approximately six million shares daily with a penny bid/ask spread.

Subscribe to CFRA Research's The Outlook here…

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