XLB Against The Sum Of Its Parts

Published on Saturday, 18 February 2012 09:10 Written by Todd Shriber

New York, February 18^th (Tradershuddle.com) –  There are plenty of materials ETFs on the market today, but few can boast of heft and wide following of Materials Select Sector SPDR (NYSE: XLB). Home to 29 stocks and almost $8.9 billion in assets under management, XLB is often used by professional money managers and traders as a gauge of just how intense risk appetite in the market is. With a slew of high-beta holdings, XLB is indeed good for the purpose of measuring risk appetite.

But how does the ETF stack up against its top five holdings, which combine for about 44% of the fund’s weight? That group includes Dow component DuPont (NYSE: DD), Monsanto (NYSE: MON), Freeport McMoRan (NYSE: FCX), Praxair (NYSE: PX) and Newmont Mining (NYSE: NEM). Let’s see what’s better, the ETF or the individual stock(s).

It’s hard, maybe even foolish to complain about the fact that XLB is about 12% year-to-date through Friday February 17. And as we have mentioned many times in recent weeks, miners have been struggling, so it’s no surprise that XLB has sharply outperformed Newmont. The ETF has also easily trumped Praxair.

On the other hand, DuPont has slightly outperformed the ETF and the margin grows even wider with Monsanto. Surprisingly, Freeport, the largest U.S. copper miner, has bested the entire group by a sizable margin. Change the time frame to the past month and only DuPont beats XLB.

Over the past year, Praxair is easily the best performer of this group, but that’s a triple-digit stock and XLB offers one of the largest exposures to the stock of any ETF, making it a more cost-efficient option than owning the stock directly.

What may be a surprise to some investors is the five-year performance of the group of securities highlighted here. XLB and DuPont are tied for last spot with negative performances over that time. That might be attributable to several factors. First, while most ETFs, XLB included, are passively managed, they do change their composition at least once or twice a year so XLB may have simply been stock holding the wrong stocks at the wrong time. That’s no excuse, it’s just a potential factor behind XLB’s glum five-year returns.

Second, the past five years includes the global financial crisis when materials stocks were savagely punished. It’s highly likely professional traders sold short XLB quite a bit in 2008 and early 2009. After all, that’s part of the benefit ETFs: Sector identification is a lot easier than stock-picking, regardless of whether one wants to be long or short.

For the rest of 2012, the factors determining XLB’s performance will be DuPont’s ability to keep costs manageable, Monsanto’s ability to make a habit of beating Wall Street estimates and raising its outlook and overall sentiment toward Freeport. XLB does have an advantage over its top three holdings that is rarely talked, it has a lower beta than DuPont and Freeport and that might work in the ETF’s favor as the year progresses.