Materials Sector ETF Gaps Up, Nearing New High

What happens when a decidedly non-glamorous sector shows strength? Making money is always the goal of investors, so it can pay to understand what’s happening with a sector that doesn’t get much love in the media. 

One of those so-called “boring” sectors, materials, is up 4% in September, and more than 5% year-to-date. The materials sector is taking a leadership role, for the moment anyway, as the always-sexy information technology sector takes a breather.

The materials sector is comprised of companies in the construction materials, chemicals, forest products, metals, mining companies and packaging products, among other subindustries. 

One reason for its current outperformance is the health of the housing market. Forestry products are selling well on demand for new home construction and home repairs and remodels. Low interest rates and stimulus payments were factors driving those trends. 

Economic recovery, the pace of which is highly uncertain, will likely be a driver of continued sector performance. 

Heaviest Weightings Within Sector

It’s often instructive to use a sector ETF as a proxy for performance, as well as to understand the sector internals,

The Materials Select Sector SPDR ETF (XLB)
is up 3.75% year to date. Performance of an ETF is always somewhat lower than its underlying index, as an ETF incurs fees not found in the index itself.

As with any index, the most heavily weighted stocks have the greatest sway over performance. 

The largest weightings within the materials sector are not necessarily the household names you’ll find in a sector like technology or consumer discretionary. The largest holdings are:

  • Linde
    (LIN) The U.K.-based supplier of industrial gas is up 18.86% year to date. Despite industrial slowdowns earlier in the pandemic, the company has been growing sales. It  reported earnings per share of $1.90 in the most recent quarter, beating analyst estimates by 15%. 
  • Air Products & Chemicals
    (APD) This company is also a provider of industrial gases and related gear to various industries. The stock is up 28.94% year to date. It topped analysts’ earnings expectations by 1.16% last quarter. The stock has gotten support along its 20-day moving average after pulling back slightly from its all-time high of $310.74 on 
  • Sherwin-Williams
    (SHW) This name is probably familiar to anyone who’s spruced up their home. The paint manufacturer and retailer is up 29.98% in the past three months. It reported earnings of $6.48 per share in the second quarter, up 29% from the previous year. Sales were down in some industrial sales, although retail sales (the homebuilding and home improvement markets) gained. 
  • Newmont
    (NEM) The gold miner reported year-over-year earnings growth of 167% in the most recent quarter. The stock has been consolidating and finding support along its 10-week moving average. Despite the recent rise in gold prices, Newmont is among mining firms slowing production due to COVID-19-related concerns.
  • Ecolab
    (ECL) This company markets cleaning and sanitization products to hotels and restaurants. On the one hand, those products are needed more now than ever. On the other hand, Ecolab’s customers were shut down due to COVID, or operating under restrictions. The company’s earnings and sales declined at double-digit rates in the most recent quarter. 

Shares of the materials ETF gapped up in Monday’s session. While rising sentiment about mergers & acquisitions activity, along with optimism about a COVID vaccine propelled the broader market higher, there’s reason to believe this sector could continue its uptrend.

The ETF’s chart flashed a bullish signal in July, as the 50-day moving average crossed above the 200-day line. This crossover often precedes a longer uptrend, although as with any investment, downside trading can be offset with diversification into other sectors, global regions and asset classes.

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