Post-election uncertainty isn’t derailing the Materials Select Sector SPDR Fund (XLB).
In fact, the largest ETF dedicated to materials stocks hit a record high on Thursday, indicating that markets may be pricing in a victory by the Democratic presidential nominee, and a subsequent cyclical rally.
XLB “seeks to provide precise exposure to companies in the chemical, construction material, containers and packaging, metals and mining, and paper and forest products industries,” according to State Street.
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.
XLB’s Rapid Growth
XLB has been one of the best-performing non-leveraged sector ETFs in recent days.
“XLB is up 28% in the last six months, fourth behind Industrials (NYSEARCA:XLI), Information Technology (NYSEARCA:XLK) and Consumer Discretionary (NYSEARCA:XLY). It’s up 3% in the last month and more than 5% in the past five days,” according to Seeking Alpha.
The basic materials sector is a category of equities that represent companies involved in the discovery, development, and processing of raw materials. The sector includes companies engaged in mining and metal refining, chemical products, and forestry products.
Companies in this sector supply most of the materials used in construction and development. As a result, they are sensitive to changes in the business cycle and tend to thrive when the economy is strong.
Finally, XLB’s technicals look appealing.
“The group signaled tactical strength on a break above the 2018 relative downtrend but remains mired in a long-term 2011 relative downtrend,” Bank of America Technical Strategist Richard Suttmeier wrote in a note. “A positive turn for tactical MAs and bullish rotation for cyclicals are making a break above downtrend resistance, and leadership, more likely.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
