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Although the U.S. market appears highly uncertain, there are still a variety of market segments that can be potential hits for investors over the long term. This could be especially true in some segments which have both cyclical and discretionary characteristics, specifically the waste management industry (A Closer Look at the Waste Management ETF).
No matter what is happening in the broader economy, trash will be produced and in vast quantities. This presents a steady opportunity for a variety of companies which are able to manage, dispose of, or eliminate the refuse.
However, there is also a discretionary aspect to the segment as well; as more is produced and consumed, more trash is invariably produced, adding to the demand for those in the industry. Thus, waste management firms are also heavily correlated to growth levels despite their relatively stable nature otherwise.
Waste Management Sector in Focus
The U.S. waste industry is divided into two segments, namely hazardous waste and non-hazardous waste. Most hazardous waste results from various manufacturing processes and poses threats to public health or the environment. Non-hazardous waste is divided into several categories, including municipal solid waste and several kinds of industrial waste (The Comprehensive Guide to Consumer Staples ETFs).
Management of both these types of wastes plays a very important role in any economy as it involves the removal of tons of materials in an efficient and timely manner that also keeps the product relatively segregated and safe from the general populace.
Due to this, there are often significant barriers to entry, either in terms of switching costs, network effects, or regulatory hurdles, helping to keep the sector a solid long-term play for patient investors.
The strong sector fundamentals have thus helped waste management firms to hold steady in this current market environment. Thanks to some of these benefits, the sector ranks favorably within our Ranking system, especially from an ETF look.
About the Zacks ETF Rank
This technique provides a recommendation for the ETF in the context of our outlook of the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors as well.
The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, Zacks Rank reflects the expected return of an ETF relative to other ETFs with a similar level of risk (read ETFs That Will Haunt Your Portfolio).
Using this strategy, we have found one ETF which is Ranked 1 or ‘Strong Buy’ in the waste management industry which we have highlighted in greater detail below:
Market Vectors Environmental Services ETF (EVX)
The Market Vectors Environmental Services ETF seeks to replicate the price and yield performance of the NYSE Arca Environmental Services Index. The fund was initiated in October 2006 and since then has managed to build assets under management of $19.9 million (Ten Biggest U.S. Equity Market ETFs).
The product holds a total of 22 securities in which Republic Services, Inc. (RSG - Analyst Report), Waste Management, Inc. (WM - Analyst Report) and Stericycle, Inc. (SRCL - Analyst Report) hold the top three positions. The top three companies get double-digit allocation in the fund while, among others, the fund does not appear to invest more than 9.31%. The fund appears to be concentrated in the top 10 holdings with more than 65% of asset base invested in that group.
In terms of sector exposure, Industrials dominates the holding pattern and the fund’s performance largely depends on it as it takes the major chunk of the asset base. In this sector, the fund has allocated more than 70% of its asset base (Three Industrial ETFs Outperforming XLI). Utilities and Energy take the second and third spots.
From a market capitalization perspective, the fund does not appear to be inclined to any specific market cap level and allocates the asset base almost equally among the various market cap ranges. Large caps get a share of 39.8% while mid caps and small caps get an allocation of 29.6% and 30.6%, respectively.
EVX charges an expense ratio of 55 basis points from the investor on a yearly basis. The fund is heavily invested in Industrials and its performance largely depends on the performance of the sector. U.S. Industrial sector performance has been robust with rising industrials production levels and higher capacity utilization rate.
This positive aspect of the sector positively impacted the performance of the fund which delivered a return of 13.4% over a span of one year and 7% in the year-to-date period. This decent performance, along with the long term health of the space, could make EVX an interesting pick for investors seeking more industrial exposure in a potentially lower risk segment at this time.
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