The materials sector is one of the smallest sector weights in the S&P 500, but that is not preventing the group from generating big returns in June. The Materials Select Sector SPDR Fund (XLB), the largest exchange traded fund dedicated to materials stocks, entered Thursday with a month-to-date gain of 7.20%.
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.
“In fact, the materials group, the sector that tends to be the most sensitive to global economic growth expectations, is on track for its best monthly gain since October of 2015, when it soared 13.45%, according to Dow Jones Market Data,” reports MarketWatch.
Materials: A Cyclical Sector
Materials is one of the most cyclical sectors and historically thrives in the business cycle’s later stages. XLB is up more than 14% this year. On a valuation standpoint, other areas like materials, industrials and energy appear attractive relative to the S&P 500.
“The materials sector had been the most beaten down as stock prices fell in May, but has started to show an outsize rebound because there is growing hope that global central banks will ease monetary policy, some Wall Street analysts argue,” according to MarketWatch.
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 “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.
“Expectations in the U.S., as reflected by bets made on federal-funds futures, shows that investors are pricing in at least two rates cuts in 2019. And while the Federal Reserve hasn’t committed to cutting interest rates, Chairman Jerome Powell did say that he would consider adjusting policy to help sustain the economic expansion if trade policy tensions continue to intensify,” notes MarketWatch.
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