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The Materials Select Sector SPDR (XLB) is an ETF designed to offer investors exposure to the broad materials sector of the S&P 500 index. These are stocks of companies involved in the production or extraction of natural resources, and they can be in broad industries, such as construction, chemicals, mining, packaging, or even forest products. The ETF is structured to deliver investment results that mirror the performance of the Materials Select Sector Index. The XLB serves as the benchmark materials ETF in the US equity markets and allows investors to achieve targeted results in a potentially lucrative sector. The fund was launched on the 16th of December 1998 and trades on the New York Stock Exchange Arca under the ticker symbol XLB.
The XLB includes only large-cap stocks, which makes it one of the most reliable investment options for investors. The fund started out with a price of circa $20 and traded sideways in its first few years before gathering upward steam in 2003. It gradually drifted higher, managing to hit a high of circa $45 by May 2008. The effects of the global recession inspired a fall to lows of circa $19, after which a multiyear rally pushed the ETF to highs of just above $63 by January 2018. A period of consolidation followed, but the coronavirus-inspired economic downfall provided headwinds that sent the XLB to lows of $40 by March 2020. The ETF has since recovered nicely, and continues to trade near its all-time highs of circa $65, as of August 2020.
XLB tracks the Materials Select Sector Index, a float-adjusted market capitalisation-weighted index. For a stock to be included in the ETF, it must meet the following conditions:
The fund is rebalanced quarterly in March, June, September and December for reweighting purposes. The calculation frequency is in real-time, and the calculating currency is the US dollar (USD).
The top 10 stocks in the XLB as of August 2020 are:
The Chemicals industry is by far the dominant industry in the ETF, with a weight of about 69%. This is followed by Containers and Packaging at around 13.55% as well as Metals and Mining at around 12.4%.
The XLB ETF is very sensitive to underlying economic conditions, both in the U.S. and globally. The demand for materials, and consequently the underlying stocks, usually rise in good economic conditions and fall in weakening economic conditions. This is one reason the sector dipped in the 2008 financial crisis, as well as during the early months of 2020 due to the coronavirus pandemic. Materials companies have an obvious impact on the environment due to the nature of their operations. This makes the sector an especially conspicuous target of legislation or taxation policies. Also, the potentially hazardous nature of their operations can also attract lawsuits or PR challenges that may weigh down individual stocks, and consequently the entire ETF.
As highlighted above, the XLB ETF is composed of only a few large-cap stocks. This means that major changes in top individual stocks or the Chemicals industry will have a significant impact on the overall price of XLB. Another very important factor to consider is the U.S. currency strength. Most global commodities are priced in USD, which means that a weaker USD increases the value of commodities and vice versa. A weaker USD provides tailwinds for Materials stocks and consequently the XLB, whereas a stronger USD tends to trigger lower prices for the XLB.
If you want to speculate on the movements of the largest materials companies in the U.S. you can do it all together with the Materials Select Sector SPDR. It provides traders with access to a grouping of the top large-cap natural resource, manufacturing, chemical, packaging and other stocks from the S&P 500. If you have a strong feeling on the direction of the U.S. economy the Materials Select Sector SPDR can be a good way to play this as it is very sensitive to the strength of the U.S. economy.
It’s not really possible to call the Materials Select Sector SPDR the best materials funds as sometimes it outperforms and other times it underperforms its peers. We can say that it is an excellent way to trade on the movements of the broader S&P materials sector. That sector, along with the industrial and financial sector, tends to be very cyclical, moving in response to the strength or weakness of the U.S. economy. That often leads to long and strong trends in the sector, and in this ETF.
First of all you’ll want to make sure you’re trading this fund as a CFD to avoid the fees that go along with ETFs when traded directly. Then you’ll need to figure out if the U.S. economy is getting stronger or weaker. That’s going to give you the broad trend to expect from this ETF. Once you know the direction of the trend you can look to trade only in that direction, especially when the market bounces off of support or resistance levels. This strategy can work for a very long time since market cycles tend to last for quite some time.