Look to RTM for Overweighting Materials Sector Exposure | ETF Trends

All S&P 500 sectors finished higher in November, with materials in the lead by a significant margin.

The S&P 500 Materials sector rose 11.76% during November, outperforming all other sectors. Materials was trailed by industrials (7.85%), financials (7.04%), utilities (7.02%), real estate (6.90%), communication services (6.85%), consumer staples (6.37%), information technology (6.03%), health care (4.82%), energy (1.26%), and consumer discretionary (0.99%), according to S&P Dow Jones Indexes.

The materials and energy sectors are commonly expected to perform well during a slowdown, as the positive output gap during this phase tends to lead prices of oil and basic materials higher and contribute to profitability. However, the boom of commodity prices during US economic slowdowns has occurred less frequently since the 1980s as these markets have become more integrated with the global market, according to State Street Global Advisors’ Sector Business Cycle Analysis.

As the U.S. economy has become more service-based and less reliant on resource-intensive production, global manufacturing has shifted to Asia, driving flows of natural resources to that region. Therefore, while materials may have become less sensitive to the overall U.S. economic cycles, the sector is now more impacted by global economic conditions, according to SSGA.

Investors looking to add focused exposure to materials to their portfolio may want to consider an equal weight approach to the sector, such as the Invesco S&P 500 Equal Weight Materials ETF (RTM). While the cap-weighted index outperformed the equal weight Materials index by 70 basis points in November, equal weight has helped mitigate losses over a longer time period.

Year to date, the S&P 500 Equal Weight Materials sector has declined -3.36% compared to the cap-weighted sector’s decline of -7.10%, according to YCharts. An equal-weight strategy can reduce concentration risk by weighting each constituent company equally so that a small group of companies does not have an outsized impact on the index.

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