A Sector ETF To Be Bullish On

It can be hard to be bullish on sectors when they are slumping: just look at the materials sector. It's one of the smallest sector weights in the S&P 500, but it is sporting one of the largest year-to-date losses. The Materials Select Sector SPDR XLB is lower by 5.7 percent, a performance that is nearly 500 basis points worse than the S&P 500.

Still, some analysts see opportunity with XLB, the largest materials exchange traded fund by assets. Every month, AltaVista Research publishes a report on the 10 sector SPDR ETFs, including XLB. For April, XLB is the only fund with an Overweight rating. AltaVista rates the other sector SPDR ETFs Neutral or Underweight.

“Typically, funds in this category consist of stocks trading at attractive valuations and/or having above-average fundamentals,” AltaVista said of its Overweight rating.

Diving Into XLB

The $4.56-billion XLB tracks the Materials Select Sector Index and holds 25 stocks. This is a cap-weighted ETF and a top-heavy one at that, as DowDuPont Inc. DWDP accounts for 21.8 percent of XLB's roster. No other stock accounts for more than 8.2 percent of XLB's weight.

Over 72 percent of XLB's holdings are chemical manufacturers, while 13 percent are containers and packaging firms. XLB devotes about 10.5 percent of its weight to metals and mining firms, companies that have been affected, for better and worse, by the Trump administration's tariffs.

Domestic industrial metals makers, including aluminum and steel producers, initially rallied when the tariffs were announced, but the White House subsequently unveiled diluted versions of the initial tariffs. 

Waiting On The Bulls

“Comparisons between forecasts and historical results are distorted by the recent merger of DowDupont, which dominates the fund, and as a result our rating should be discounted,” said AltaVista. “Nonetheless we know that abundant domestic energy supplies are spurring an investment boom among the chemical firms that comprise about 70 percent of the sector, and the sell-side analysts who cover these firms have been growing increasingly bullish.”

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