The materials sector has been a laggard this year as highlighted by the average year-to-date return of 5.5% for the Materials Select Sector SPDR (NYSEArca: XLB) and the Vanguard Materials ETF (NYSEArca: VAW).
Although materials stocks and ETFs have disappointed investors in 2014, it is worth noting that one year’s laggard sectors can often turn into the following year’s leaders. With that in mind, investors evaluating materials ETFs may want to consider this year’s leader of a lagging group: The Guggenheim S&P Equal Weight Materials ETF (NYSEArca: RTM).
Somewhat unheralded among materials ETFs, RTM is slightly ahead of its cap-weighted rival XLB for top honors among materials ETFs in 2014. With equal-weight ETFs, be it a sector play like RTM or a broad market fund such as the Guggenheim S&P 500 Equal Weight ETF (NYSEArca: RSP), there are tradeoffs to be made. [A Look at Alternatively-Weighted ETFs]
For example, an oft-cited advantage of equal-weight ETFs is the ability of those funds to damp single stock risk. The other side of that coin is equal-weight sector ETFs can be disadvantaged if a particular sector’s largest components are among its best performers.
To an extent, that has been the case with the materials sector this year. DuPont (NYSE: DD) has surged nearly 19%, making it one of the best performers in the Dow Jones Industrial Average. The stock is XLB’s largest holding at 11.6% of that ETF’s weight, but accounts for just 3.5% of RTM’s weight. Even with that handicap, RTM has managed to lead materials ETFs in 2014.
The good news is RTM’s weights to laggards such as Monsanto (NYSE: MON) and LyondellBasell Industries (NYSE: LYB), which are up an average of less than 5% in a year in which the S&P 500 is up 12.6%, is significantly below that of XLB.