A Marvelous Materials ETF

Somewhat quietly, the materials sector is enjoy a very solid year. The Materials Select Sector SPDR XLB is up 15.2 percent, putting the largest materials exchange-traded fund in the upper echelon of the sector SPDR ETFs.

Although the materials sector is one of the smallest sector allocations in the S&P 500, there is competition in this corner of the ETF space. For example, XLB and other cap-weighted materials ETFs are facing rising competition from smart beta materials ETFs. The First Trust Materials AlphaDEX Fnd (ETF) FXZ is one of the largest, most seasoned members of the smart beta materials ETF club.

FXZ

Up 19.4 percent year-to-date, FXZ was one of 13 ETFs to hit all-time highs Tuesday. Like the other AlphaDEX ETFs, FXZ focuses on “growth factors including three, six and 12-month price appreciation, sales to price and one year sales growth, and, separately, on value factors including book value to price, cash flow to price and return on assets,” according to First Trust.

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The $324.6 million FXZ is home to 51 stocks. Nearly 37.6 percent of the ETF's holdings are chemicals makers while another 17.4 percent are container and packaging companies. Mining and metals firms are FXZ's third-largest industry weight at 12.6 percent.

Although no individual holding commands a weight of more than 3.7 percent in FXZ's lineup, the ETF has some exposure to some of the “sub-themes” that have been boosting the materials sector this year. In recent days, that has included mergers and acquisitions activity among fertilizer makers. Over the course of this year, steelmakers have been important drivers of the materials sector's bullishness and FXZ is levered to that theme as well.

The Bottom Line On Materials

Commodities are seen as sensitive to U.S. interest rates, but the materials sector is not as inversely correlated to rates as, say, telcom or utilities. As a cyclical sector, materials can actually perform well if the Federal Reserve raises interest rates because that would be a sign the Fed is confident the economy is strong enough to endure higher borrowing costs.

“Commodities — and notably industrial metals and energy, which are the most growth-sensitive subsectors — did particularly well, with an average gain of more than 25 percent,” during previous tightening cycles, reported Mining.com, citing Allianz research.

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