Merger Boosts Materials ETFs

More consolidation in the chemicals sector led another merger Monday to kick off the week. Germany-based Merck KGaA is buying Sigma-Aldrich SIAL for $17 billion in cash, a 37 percent premium to SIAL’s closing price on Friday. SIAL is a manufacturer of chemicals and laboratory kits used in scientific research.

As more foreign companies are merging with U.S.-based firms in an attempt to lower taxes through a process referred to as inversion it could lead to more consolidation in the global chemicals sector. It is very difficult to attempt to pick the specific stocks that will be taken over, therefore a lower risk strategy is to invest in the chemicals sector through an ETF.

There are two ETFs that concentrate on the materials sector, but when the portfolio is analyzed it shows that the majority of the stocks are in the chemicals sector.

The Vanguard Materials ETF VAW seeks to track the performance of a benchmark index that measures the returns of publically traded companies in the materials sector. It consists of 132 companies with the top ten holdings making up just under 50 percent of the entire ETF. The top holdings include Dow Chemical Co DOW with a 7.5 percent holding, EI du Pont de Nemours & Co. DD making up 7.1 percent, and Monsanto Co. MON with a 7.1 percent holding as well. Approximately two-thirds of the ETF is invested in chemical stocks. SIAL makes up 1.5 percent of the allocation. VAW is up 19 percent of the last 12 months, and up 7 percent over the last six months. VAW has an expense ratio of 0.14 percent beating most of its competitors.

The Materials Select Sector SPDR Fund XLB follows 32 publicly traded companies in the materials sector. The portfolio is distributed across five sub sectors with chemicals making up 74 percent and metals and mining at 13 percent being the top two. XLB has the same top holdings as VAW but in a different order; DD is the top holding at 10.6 percent holding, MON at 9.8 percent, and DOW making up 9.7 percent of the fund. SIAL accounts for 2 percent of the ETF. XLB has performed well, up 20 percent over the last 12 months, and 7 percent over the last six months. XLB boasts a favorable 0.16 percent expense ratio.

Both ETFs outperformed the overall market on Monday after the news of the SIAL takeover was announced. Along with being a play on more potential mergers in the chemical sector, the ETFs also over exposure to companies that should do well during the continued stock market rally and global economic rebound.