The materials sector is the second-smallest sector exposure in the S&P 500 at 2.64%. Only utilities at 2.6% is smaller, but that doesn’t mean that there aren’t potentially big opportunities with materials.
Some market observers believe that the sector is the place to be and that the Invesco S&P 500 Equal Weight Materials ETF (RTM) is a prime idea among related exchange traded funds. RTM follows the S&P 500® Equal Weight Materials Index, which equally weights the materials stocks residing in the S&P 500.
These days, the sector is a valuation play, as highlighted by Bank of America in a recent note.
“Materials ETFs are the most attractive within US equity sectors from a valuation perspective. The group is the most oversold at -0.36 standard deviations from average valuation. Average price-to-earnings and price-to-free cash flow ratios are particularly attractive relative to other sector ETFs,” says the bank.
Bank of America goes so far as to recommend materials over the once-vaunted technology sector, and RTM is one of the research firm’s preferred ideas among materials ETFs.
“Materials is the third most attractive sector on our US equity strategists’ S&P 500 momentum & value framework. Construction Materials and Chemicals screen as some of the most attractive industries,” notes Bank of America.
While valuation is a legitimate advantage, RTM offers another significant benefit in the form of reduced concentration risk. That’s relevant because in the cap-weighted S&P 500 Materials Index, just one stock (Linde Plc.) commands a weight of 16%. Conversely, none of RTM’s 29 holdings exceed a weight of 4.52%.
And yes, RTM is attractively valued, indicating that the combination of compelling valuations and less concentration could be interesting for sector investors.
“RTM is currently trading with a 12 month forward P/E of 12.7x, which is -1.8 standard deviations from its long-term average,” notes Bank of America. “RTM has almost 60% exposure to Construction Materials and Chemicals.”
Nearly 39% of of RTM’s member firms are classified as value stocks, while only 10% have the growth designation. About 72% of the holdings in the $462.1 million RTM are mid-cap stocks, and that size factor advantage is meaningful because over the past three years, RTM is up 68.6% and the large-cap S&P 500 Materials Index is only up 55%.
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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.