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Materials ETFs Head to Head: XLB vs. IYM

The materials sector is garnering a lot of investor attention lately. Industrial Metals have been rebounding on greater global optimism. This is primarily due to robust global growth cues and strong demand. Manufacturing has been picking up pace globally and driving demand for metals.


Cause for Appeal


On Oct 19, the Senate passed a budget of $4 trillion in a 51-49 vote, which will allow the Republicans to move ahead with the tax cuts with a simple majority instead of the 60-vote supermajority that is generally required. Moreover, this has increased investor optimism about President Donald Trump delivering on his promises of greater infrastructure spending, which is expected to give a boost to the materials sector (read: GOP Nears Tax Reform: Buy These ETFs).


Per the Commerce department, construction spending increased 0.3% in September on a monthly basis to $1.22 trillion. It grew 2% on a year-over-year basis.


Moreover, strong earnings performance has contributed to gains in the sector. U.S. economic fundamentals seem to be strong. GDP increased 3% annually in the July-September period compared with a 3.1% increase in the third quarter.


Let us now discuss two ETFs focused on providing exposure to the sector.


Materials Select Sector SPDR ETF XLB


This fund seeks to provide exposure to materials stocks and tracks the Materials Select Sector Index. It has AUM of $4.4 billion and charges a moderate fee of 14 basis points a year. It has 25 holdings and bears significant concentration risk as over 68.7% of the assets are allocated to the top 10 holdings.


From a sector look, the fund has high exposure to Chemicals, Containers & Packaging and Metals & Mining, with 72.9%, 13.2% and 9.2% exposure, respectively (as of Sep 30, 2017). The fund’s top three holdings are DowDuPont Inc. DWDP, Monsanto Co. MON and Praxair Inc PX with 22.9%, 8.0% and 6.5% allocation, respectively (as of Nov 7, 2017).  The fund has returned 26.4% in a year and 18.0% year to date (as of Nov 7, 2017). XLB has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.


iShares U.S. Basic Materials ETF IYM


This fund seeks to provide exposure to materials stocks and tracks the Dow Jones U.S. Basic Materials Index. It has AUM of $967.3 million and charges a fee of 44 basis points a year. It has 50 holdings and bears significant concentration risk as over 66.5% of the assets are allocated to the top 10 holdings.


From a sector look, the fund has high exposure to Diversified Chemicals, Specialty Chemicals and Fertilizers & Agricultural Chemicals, with 28.6%, 22.7% and 12.7% exposure, respectively (as of Nov 6, 2017). The fund’s top three holdings are DowDuPont Inc., Monsanto Co. and Praxair Inc with 24.2%, 7.8% and 6.2% allocation, respectively (as of Nov 6, 2017). The fund has returned 28.7% in a year and 19.3% year to date (as of Nov 7, 2017). IYM has a Zacks ETF Rank #3 with a High risk outlook.


Bottom Line


XLB is more popular than IYM, as is evident from its higher AUM. Moreover, it also may be more appealing to investors owing to its cheaper expense ratio.  However, IYM has a more diversified exposure in terms of number of holdings.


Moreover, both the funds have had relatively similar year-to-date performance. IYM returned 1.3% more than XLB so far this year whereas in a year, IYM outperformed XLB by 2.3%. With growing developments in the sector, these ETFs are poised to offer great growth potential. However, since the factors driving growth in this sector are still exposed to a great deal of uncertainty, a more popular ETF like XLB might help alleviate some of the political uncertainties prevailing in the region.


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Praxair, Inc. (PX): Free Stock Analysis Report
 
SPDR-MATLS SELS (XLB): ETF Research Reports
 
ISHARS-US BA MA (IYM): ETF Research Reports
 
Monsanto Company (MON): Free Stock Analysis Report
 
Dow Chemical Company (The) (DWDP): Free Stock Analysis Report
 
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