The materials sector is the third-best performer in the S&P 500 this year, trailing only the utilities and groups. Good news for investors: The materials sector and exchange traded funds such as the Materials Select Sector SPDR (NYSEArca: XLB) are shaping up as solid sector-level ideas for the second half of 2016.
As markets move toward the late-cycle phase of the normal business cycle, investors should look to areas like the materials sector and related exchange traded funds (ETFs). With the economy recovery maturing, the materials sector, which is closely tied to the prices of raw materials, have traditionally done well as inflation rises and late-cycle economic expansions help support demand.
Related: ETF Traders Turning Bearish on Gold Miners
“The materials sector has been one of the S&P’s leaders so far in 2016 with returns trailing only utilities and energy. Todd Rosenbluth, director of ETF & mutual fund research at S&P Global Market Intelligence, said there are a number of worthwhile materials ETFs for investors looking to jump in mid-year,” reports TheStreet.com.
Looking at the basic materials sector, this market segment is dominated by chemicals producers, like Dow Chemical (NYSE: DOW), DuPont (NYSE: DU) and Monsanto (NYSE: MON), along with smaller tilts toward metals and miners, paper and timber, containers and packaging, and construction materials.
[related_stories]Materials ETFs such as XLB, the Vanguard Materials ETF (NYSEArca: VAW) and the Fidelity MSCI Materials Index ETF (NYSEArca: FMAT) have also been bolstered this year by rebounding steel equities.
Last week, Bank of America/Merrill Lynch upgraded United States Steel (NYSE: X) and Nucor (NYSE: NUE) to better-than-expected guidance. The steel industry is also strengthening from measures taken by the Commerce Department to reduce the supply of cheap Chinese steel imports, which have contributed to the lingering low prices. The commerce Department imposed a 266% tariff on Chinese cold-rlled steel imports and prices have rallied roughly 21% over teh past two months reports James Passeri for TheStreet.
Related: More Good News for the Steel ETF – AKS, X
Due to their close ties with the commodities market, materials stocks and ETFs are susceptible to cyclical demand and volatility in raw material and energy prices. While the sector’s sensitivity to business cycles can expose investors to greater risks, the area may also offer attractive returns during periods of strong growth.
For more information on the materials sector, visit our Materials category.
Materials Select Sector SPDR
