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David England: Top basic material funds
Column | Eye on the Market

David England: Top basic material funds

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Last week, I introduced you to my favorite ETFs in the industrials sector. Today, I focus on the next sector, basic materials. Why? To identify sectors that are outperforming and underperforming the market for portfolio considerations.

Some of the major indexes are making new highs, so why waste time with sector rotation?

If you are an investor or a trader, you need to be aware of sector rotation and know when funds move from one sector to another. Long-term investors may not care as they tend to hold through everything. In my long-term, garden-growing portfolios, if my high dividend-paying funds do not drop their dividends, there is no reason to sell because my goal is to see how quickly I can double my number of shares. Once I double my shares, at that point, I may decide to capture the dividends in cash.

I recognize market shifts in my trading portfolio as soon as possible and move to different areas as the markets change. I use my Simple Simon trading system to know when to buy or sell. When the market fails to make new highs, it will lead to shorting opportunities. See previous columns for details.

Today, I focus on funds in the basic materials sector involved in discovering, developing, and processing raw materials like oil, stone, and gold. Many industries rely on companies in this sector for the raw materials they need to manufacture their goods and are extremely sensitive to economic cycles. I will focus on the gold and silver sectors in later columns.

My favorite broad basic materials funds ranked by asset size are as follows:

XLB-Materials Select Sector SPDR Fund ETF tracks companies in the Materials

Select Sector Index, companies from the following industries: chemicals, metals and mining, paper and forest products, containers and packaging, and construction materials. XLB is the largest fund in this group, with assets of 9.6 B with the highest average trading volume of 7.09 M. 

VAW-Vanguard Materials Index Fund ETF tracks the performance of the MSCI US Investable Market Index-Materials; an index made up of stocks of large, mid-size, and small U.S. companies within the materials sector. VAW has assets of 3.8 B and an average trading volume of 172.3 K.

IYM-iShares U.S. Basic Materials ETF tracks companies in the Dow Jones U.S. Industrials Index. IYM has assets of 872 K and an average trading volume of 104 K, the lowest traded volume in this group. 

FMAT-Fidelity MSCI Materials Index ETF tracks companies in the MSCI USA IMI Materials Index. FMAT has assets of 595 K and an average trading volume of 157 K. 

FXZ-First Trust Materials Alpha DEX Fund tracks equities in the Strata Quant Materials Index. The index is a modified equal dollar weighted index to identify and select stocks from the Russell 1000 Index. FXZ has assets of 502 K and an average daily trading volume of 109 K, the lowest traded volume in this group.

EOM Basic Material Funds NP

I charted the performance of each fund beginning March 24, 2020, running to real-time. The results and returns by rank are as follows:

FXZ-First Trust Materials Alpha DEX Fund (blue line) up 181.07%, VAW-Vanguard Materials Index Fund ETF (red line) up 142.22%, FMAT-Fidelity MSCI Materials Index ETF (green line) up 141.11%, IYM-iShares U.S. Basic Materials ETF (pink line) up 140.77%. The group laggard, XLB-Materials Select Sector SPDR Fund ETF (purple line), up 133.82%. The market, $SPX (green area), is up 88.28%.

Here are the key points:

1. Bigger is not always better, as represented by the largest fund, XLB, being the group's laggard.

2. The smallest fund, FXZ, outperformed the market ($SPX) by an astounding 92.79%.

3. All basic material funds outperformed the returns of the market ($SPX).

4. These results represent a specific period. Different dates will result in different outcomes.

5. Past performance does not dictate future returns.

Here is what you should think about:

First, if you own similar basic material funds, how are they performing compared to these funds?

Second, if you are not tracking your funds' performance, then why?

No one knows when the next large-scale selling begins. With the markets continuing to make new highs, I will be watching to see when profit-taking begins within the top-performing sectors, and more money flows into healthcare, utility, and consumer staple funds. When this happens, the institutions will short the previous high-flyers and long the sectors moving up.

What's next? I focus on my favorite energy funds.

In full disclosure, I do not hold any securities in this column.

Plan your work, work your plan, and share your harvest!

David O. England is an investor/trader, financial analyst/educator/lecturer and Associate Professor Emeritus of Finance. This column is for educational purposes only and not intended as financial advice. Past performance does not dictate future returns. Questions? Send to thetraderseye@gmail.com.

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