XLB Materials Select Sector

The third quarter of 2013 was a mixed bag for the equity markets. It was a quarter marked by certain domestic as well as global events which could prove to be game changers going forward (see 3 Biggest ETF Winners from the 3^rd Quarter).

Nevertheless, the ETF industry seems to be going strong. U.S.-listed ETF assets have climbed $224 billion this year attributable to higher prices and net inflows of $133 billion. Investors should note that materials and the healthcare sectors are two areas which experienced maximum cash inflow in Q3. Each recorded $2 billion of fresh money for the quarter.

This could suggest that these sectors are falling into favor with investors and that bets are being made on their leadership to close out the year. Should this trend continue, we could see the following sectors push higher in the months ahead, suggesting that they might be worth a closer look by investors seeking new ideas for Q4:

Materials Sector

The materials benefited from the turnaround in metals and mining stocks. The global population growth, phenomenal rise in the Chinese economy, Asian urbanization and the increasing requirements in the developed countries have created an unprecedented demand for minerals and metals (Time to Rotate into Cynical).

Additionally, China’s recent $150 billion infrastructure stimulus has helped improve the sentiment somewhat and holds promise for the metals and mining industry going forward.

However, cost inflation is also expected to be a headwind for metal and mining companies over the next several years, driven by a number of factors such as, labor, energy, ore grades, currencies, supply constraints and taxes. Global economic uncertainties, softening commodity prices and higher input costs increase the pressure on company margins.

Investors looking to tap the sector in ETF form can invest in Materials Select Sector SPDR Fund (XLB). The fund’s asset base of $3.6 billion is spread across holdings of 33 securities. Monsanto is the largest holding in XLB, accounting for 10.6% of the ETF. Other top holdings include Du Pont de Nemours Co with 10.3% and Dow Chemical with 8.8%.

The fund appears to be quite popular as indicated by its trading volume of more than three million shares a day (Buy These ETFs to Profit from ‘Sector Rotation’)

The fund relies heavily on the chemical sector in which it has assigned an asset base of 73.1%. Metals & mining also gets a double-digit allocation of 15.65%. XLB charges a fee of 18 basis points annually. XLB recorded a gain of 3.9% in September and 9.5% in the third quarter.

Healthcare Sector

The healthcare space has led the broad market for most of the first half of 2013 and continues its incredible run into the second half as well (3 Sector ETFs to Watch for the Budget Battle).

This is largely thanks to some sector rotation along with strength in biotechnology and the pharmaceuticals firms.

The healthcare space will likely be a bright spot going forward, as the U.S. is one of the major markets for healthcare and one of the largest spenders on public health, putting the sector in an advantageous position.

In such a scenario, Health Care Select Sector SPDR Fund (XLV) can be an interesting option to choose in order to play the U.S. healthcare sector. The sector has performed relatively well year-to date, delivering a return of 24.4% in the year-to date period.

XLV boasts an impressive $7.5 billion in assets under management and distributes this asset base among 57 holdings. However, the allocation entails heavy concentration in top ten holdings with a share of 56%.

Its top holdings include well-known bellwethers like Johnson & Johnson, Pfizer, and Merck. In fact, the top three holdings gets one third of the asset allocation, thereby playing a dominant role in the performance of the ETF. The fund charges a fee of 18 basis points a year (Play Surging Health Care with These Small Cap ETFs).

Bottom Line

These two ETFs saw strong levels of interest in Q3, and decent performances to boot. Should these trends continue, these sectors might be ones to watch in the final part of the year, and especially if asset inflows continue to pile into these corners of the market.

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SPDR-MATLS SELS (XLB): ETF Research Reports
 
SPDR-HLTH CR (XLV): ETF Research Reports
 
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