Why It's a Good Time to Consider Materials ETFs

The Materials Select Sector SPDR (NYSEArca: XLB) and other materials ETFs are performing admirably this year. For example, XLB, the largest materials ETF by assets, is up 19% year-to-date.

Rivals to XLB include Vanguard Materials ETF (NYSEArca: VAW) and Fidelity MSCI Materials Index ETF (NYSEArca: FMAT). 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.

However, now could be a good time to consider the often overlooked materials sector. Historical data indicate XLB is one of the two best sector SPDR ETFs to own in December and January. Plus, cyclical sectors, of which materials certainly is one, often perform well as interest rates rise. The Federal Reserve is widely expected to raise interest rates when it meets later this month.

Importantly, an array of fundamental factors look good for materials stocks.

“In the metals and mining part of the sector, many issuers took aggressive steps to reduce debt balances that included asset sales and equity issuances. The debt reduction along with better prices for mined commodities and margins for metals has resulted in issuers being upgraded or possessing positive outlooks,” according to Morningstar.