After a strong November, this month has also been quite impressive so far, considering the Wall Street rally. The back-to-back release of positive COVID-19 vaccine news amid the aggravating coronavirus outbreak kept the market mood upbeat. Moreover, election results that showed chances of a divided Congress eased worries regarding major policy changes in the near term and largely drove the relief rally in the U.S. equities.
The materials sector has also managed to keep its promise of decent returns so far. In fact, it has returned 16.6% in the year-to-date period, in comparison to the broader S&P 500’s 13.7% gain. In addition, the space is expected to remain strong as positive vaccine news and expectations of another round of fiscal stimulus are pointing toward an improving economy in the days to come. Let’s look at the factors that present a favorable case for the sector and make it appear as an appealing investment option:
Dovish Fed & Weakness in U.S. Dollar
The materials sector, which tends to be the most sensitive to global economic growth expectations, gained from the Fed’s dovish stance in 2019. Amid the coronavirus crisis, the central bank cut rates twice to zero in 2020 after three rate cuts in 2019. Lower rates put pressure on the U.S. dollar that makes dollar-denominated materials cheaper for foreign investors, spurring demand for products that these companies sell. Also, as the sector is highly dependent on interest rates for capital expenditures, lower rates are a boon.
Considered to be a good safe-haven asset, U.S. dollars saw increased demand in the beginning of the year as the pandemic had begun and risk-on sentiments were hurt. However, with considerable progress in vaccine research and another round of fiscal stimulus in sight, it seems like greenback will have a tough time on bourses.
Asset managers have increased their short bets on the U.S. dollar to record levels. This left the greenback declining against the major peer currencies in seven of the first 11 months of the year, according to the Bloomberg Dollar Spot Index. In fact, it underperformed the two other safe-haven counterparts Swiss Franc and Yen.
Progress in Coronavirus Vaccine Development
Encouraging progress is being witnessed in the coronavirus vaccine development that is boosting investors’ hopes. Pfizer Inc. (PFE) and BioNTech SE (BNTX) have again posted encouraging updates regarding their coronavirus vaccine candidate, BNT162b2. The duo’s two-shot vaccine has been authorized by U.K. medicines regulator, the Medicines and Healthcare products Regulatory Agency (MHRA) and is being rolled out.
Furthermore, the two front-runners in the COVID-19 vaccine race, Moderna (MRNA) and Pfizer/BioNTech, have applied to the FDA for emergency-use authorization for their coronavirus vaccines. Notably, the FDA is supposed to meet its Vaccines and Related Biological Products Advisory Committee on Dec 10 to review Pfizer's application and on Dec 17 to evaluate Moderna's application, going by a CNN report.
It is important to note here that the distribution of coronavirus vaccines could start within weeks, pending authorization from the FDA, per the U.S. Health and Human Services Secretary Alex Azar (according to a CNN report). Nevertheless, it shall be June 2021 by when all Americans (who want a vaccine) will get vaccinated, according to an official with the White House vaccine initiative, per the report mentioned above.
Thus, James Hildreth, a member of the committee, told NBC’s “Weekend Today” that an authorization for Pfizer’s coronavirus vaccine could come as early as Friday (per a CNBC article). He said that “if the FDA commissioner decides to issue approval, the EUA, on that day when the vote is taken, as early as Friday of next week we could see vaccinations happening across the country,” as mentioned in a CNBC article.
Going on, Sanofi (SNY), GlaxoSmithKline's (GSK) and Johnson & Johnson (JNJ) are also progressing in the development of coronavirus vaccines and will likely be ready to introduce the vaccines in 2021.
Material ETFs to Bet On
Against this backdrop, let’s look at some material ETFs. All these have a Zacks ETF Rank #2 (Buy), suggesting their outperformance in the coming weeks.
iShares U.S. Basic Materials ETF ( IYM Quick Quote IYM - Free Report)
This ETF tracks the Dow Jones U.S. Basic Materials Index and holds 35 stocks in its basket. It has an AUM of $839.6 million and charges 43 basis points (bps) in fees and expenses. The product is heavily skewed toward specialty chemicals and industrial gases, with around 30% of the portfolio each (read:
5 Industry ETFs Defying Soft November Manufacturing Data). The Materials Select Sector SPDR Fund ( XLB Quick Quote XLB - Free Report)
The most-popular material ETF follows the Materials Select Sector Index. This fund manages $4.97 billion in its asset base. The ETF charges 13 bps in fees per year from investors. In total, the fund holds about 28 securities in its basket. In terms of industrial exposure, chemicals dominate the portfolio with around 69% share, while containers & packaging, and metals & mining round off the top three positions (read:
Spate of Upbeat Q3 Earnings Fueling Material ETFs). Vanguard Materials ETF ( VAW Quick Quote VAW - Free Report)
This fund has amassed about $2.13 billion in its asset base and offers exposure to 116 stocks by tracking the MSCI US Investable Market Materials 25/50 Index. The ETF has 0.10% in expense ratio. Specialty chemicals and industrial gases take the largest share at 28.8 and 19.4%, respectively, while others offer a single-digit exposure each.
Fidelity MSCI Materials Index ETF ( FMAT Quick Quote FMAT - Free Report)
This fund provides exposure to 117 materials stocks with an AUM of $232 million. This is done by tracking the MSCI USA IMI Materials Index. Chemicals accounts for 64.5%, while containers & packaging, and metals & mining round off the next two spots with a double-digit exposure each. The ETF has 0.08% in expense ratio.
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