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Here's Why Material ETFs are Sizzling With Opportunities

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Wall Street has responded positively to the euphoria surrounding the fresh round of stimulus and progress in coronavirus vaccine rollout. In fact, the Dow Jones Industrial Average Index, which seems to be benefiting the most from the economic recovery optimism rallied 1.5% to close at a record high of 32,297.02 on Mar 10.  The S&P 500 Index also gained 0.6%. Meanwhile, the Nasdaq Composite was nominally down due to the shifting focus from high-growth tech players.

Notably, looking at the data, it appeared like the cyclical stocks stole the show on Mar 10. The S&P 500 energy sector climbed 2.6% yesterday, thereby, rising more than 39% in 2021. Industrials, materials, and financials spaces also rallied more than 1% on Mar 10.

In this regard, Chris Hussey, a managing director at Goldman Sachs said that "Today's strength is coming from pro-cyclical stocks as investors continue to oscillate back and forth between beneficiaries of cyclical growth and those better secularly positioned," as mentioned in a CNBC article.

Considering the current optimistic scenario for the cyclical sector, let’s take a look at the factors that are going to keep favoring the growth of the material sector in 2021:

Factors Supporting the Materials Sector in 2021

In the latest turn of events, House Democrats have approved the $1.9 trillion coronavirus relief bill, also known as the American Rescue Plan Act of 2021. Notably, the legislation is expected to be signed by President Joe Biden on Mar 12, before unemployment aid programs expire on Mar 14.

It is worthy to note here that the bill was approved earlier by the Senate through budget reconciliation. Thus, the Senate passed the COVID-19 stimulus package in a 50-49 party line vote.

The coronavirus relief bill provides direct support to small businesses, $1,400 direct checks to Americans falling under the eligibility criteria, a rise in the child tax credit for a year, direct funding to state and local governments along with funding for schools and increased funds for coronavirus vaccine distribution and testing, per a CNBC article. However, the stimulus checks’ income limits have now been revised and the weekly unemployment benefits have been reduced from $400 to $300 by the Senate and will run through September, as stated in the article.

With regards to the coronavirus vaccine development and distribution, positive news is doing rounds. The FDA has awarded the Emergency Use Authorization to COVID-19 vaccine that is developed by Janssen Pharmaceutical Companies of Johnson & Johnson (JNJ - Free Report) . The company has started shipping and aims at delivering more than 20 million doses to the U.S. government in March and targets 100 million doses in the first half of 2021. Furthermore, Merck & Co., Inc. (MRK) has signed a deal with J&J to support the manufacturing of the latter’s single-shot COVID-19 vaccine.

In fact, President Joe Biden has stated that the country is expected to have sufficient COVID-19 vaccines for all adults who want to get vaccinated by the end of May, per a YahooFinance article.

The materials sector can directly gain from these two encouraging developments with regards to another round of stimulus and coronavirus vaccine rollout. These dual forces are expected to drive the United States to a path of faster economic recovery.

Further boosting confidence is the reopening of the U.S. economy. As the U.S. economy opens and gradually moves toward normalcy, the demand for goods and services will increase. In this regard, the Centers for Disease Control and Prevention announced that people who have completed the coronavirus vaccination process can safely hold indoor meets without the compulsion to wear masks, as mentioned in a CNBC article. Furthermore, California health officials gave a nod to Disney’s Disneyland and other theme parks along with outdoor stadiums and ball parks to reopen with limited capacity on Apr 1, per the article.

The unemployment levels are also improving, which is a healthy pointer to a recovering economy. The U.S. economy added 379,000 jobs in February 2021, after an upwardly revised 166,000 rise in January and beating market expectations of a rise of 182,000, per the verified sources. The U.S. unemployment rate declined to 6.2% in February 2021, the lowest since April's record high of 14.8% and below market expectations of 6.3%. Still, the unemployment rate remained well above the pre-pandemic levels.

The materials sector, which tends to be the most sensitive to global economic growth expectations, is gaining from the Fed’s dovish stance. Notably, lower rates put pressure on the U.S. dollar that makes dollar-denominated materials cheaper for foreign investors. This, in turn, increases demand for products that these companies sell. Also, as the sector is highly dependent on interest rates for capital expenditures, lower rates act as a blessing.

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 outperformance in the coming weeks.

iShares U.S. Basic Materials ETF (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 $582.5 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: ETF Areas to Consider as Senate Passes COVID-19 Relief Bill).

The Materials Select Sector SPDR Fund (XLB - Free Report)

The most popular material ETF follows the Materials Select Sector Index. This fund manages $6.54 billion in its asset base. The ETF charges 12 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: What's in Store for Material ETFs in Q4 Earnings?).

Vanguard Materials ETF (VAW - Free Report)

This fund has amassed about $2.78 billion in its asset base and offers exposure to 115 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 29.4% and 18.2%, respectively, while others offer single-digit exposure (read: 10 Sector ETFs Flying Higher on a Recovering Economy).

Fidelity MSCI Materials Index ETF (FMAT - Free Report)

This fund provides exposure to 115 materials stocks, with an AUM of $348.6 million. This is done by tracking the MSCI USA IMI Materials Index. The ETF has 0.08% in expense ratio.

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