XLB Materials Select Sector

The recent volatility in the equity market has made investors overly cautious while forming their portfolios. Thanks to the worries over the stand-off between Russia and the West, a stretched valuation of the stock markets and the resultant sell-off in momentum stocks, slowdown in China, and last but not the least, possibility of the end of cheap dollar era this year, many investors are more skeptical about a broad recovery.

The skepticism has left many sector ETFs severely beaten down, but some have managed to tread water and look to offer decent returns for the ongoing quarter, even if the current volatility persists. Secular strength in the underlying sectors will likely help these ETFs to beat the broader market in the coming months (read: 3 ETFs Hitting All-time Highs in Rocky Market).

Below, we highlight three lucrative sector ETFs that could be used to book some profits in today’s volatile market. Each offers an interesting or unique fundamental to protect investors’ portfolios in an uncertain economy:

Utilities Select Sector SPDR ETF (XLU)

This sector has given an incredible performance this year. Risk-off trade sentiment prevailing among investors so far this year hurt by the high beta pain and a surprising plunge in long-term interest rates made the sector one of the best performing ones in 2014 (read: 3 Utility ETFs Surviving the Market Turmoil).

Utilities is one of the few sectors that are likely to log double-digit earnings growth in Q2. As of now, the earnings from the sector are expected to gain about 14% in Q2 as per the Zacks Earnings Trend. As a result, the biggest utility ETF, XLU, gained more than 15% in the year-to-date frame (as May 2, 2014) against 2.42% return delivered by SPDR S&P 500 ETF (SPY).

The product tracks the S&P Utilities Select Sector Index and has amassed $6.5 billion since its inception.  The fund holds a small basket of 32 stocks, with around 60% of its assets devoted to its top 10 holdings, suggesting higher concentration risk. Duke Energy (9.08%), NextEra Energy (8.13%) and Dominion Resources (7.87%) occupy the top three positions of the fund.

Materials Select Sector SPDR Fund (XLB)

Construction activity is on the rise in the U.S. as evident by the 11.2% projected earnings growth (for Q2) by the Zacks earnings trend.  Industrial activities have also been on fire. All these factors along with the turnaround in metals and mining stocks, urbanization in Asia, and increasing demand in developed countries should help the material sector and the related ETF.

The earnings for the Basic Materials sector should see a 14.1% expansion in Q2, which is one of the highest estimates among the 16 sectors classified under the Zacks Earnings Trend.

Investors looking to tap the sector in ETF form can invest in the sector giant XLB. The fund’s asset base of $5.4 billion is spread across holdings of 32 securities. E. I. du Pont is the largest holding in XLB, accounting for 10.5% of the ETF.  Dow Chemical with 10.08% of holdings and Monsanto with 9.85% of holdings round out the top three allocations of the fund (read: Two Popular ETFs of Q3 to Watch in Q4).

The fund appears to be quite popular as indicated by its trading volume of more than 6 million shares a day. The fund relies heavily on the chemical sector which accounts for 73.9% of the asset base. XLB charges a fee of 16 basis points annually. XLB recorded a gain of 2.89% on the year-to-date basis.

iShares U.S. Oil & Gas Exploration & Production ETF (IEO)
 
Thanks to the record chills this winter, natural gas prices saw a nice rally this year. As nearly half of the Americans use natural gas as a heating source for their homes, the record low temperatures have led to a significant boost in natural gas prices this year.
 
In fact, the rally will likely continue in the months ahead as heightened consumption pushed down the natural gas inventory to the 11-year low level (read: 3 Hit and Flop ETFs of April).   
 
If this was not enough, the face-off between oil-rich Russia and the West should keep the oil price high in the coming months. As of now, Zacks Earnings Trend predicts 10.1% rise in Q2 earnings from oil/energy companies.
 
IEO can be a winner in this pack. This ETF tracks the Dow Jones U.S. Select Oil Exploration & Production Index and holds 77 securities in its basket. The fund has $491.7 million in its AUM and trades in good volume of nearly 75,000 shares per day. It charges 45 bps in annual fees.
 
The product is heavily concentrated on the top firm – ConocoPhillips (COP) – at 13.4% while EOG Resources (EOG), Anadarko Petroleum (APC) and Phillips 66 (PSX) round off to the next three spots with combined 21% of assets.

The fund added about 10% so far this year and has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a ‘High’ risk outlook.
 
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CONOCOPHILLIPS (COP): Free Stock Analysis Report
 
ISHARS-US O&G (IEO): ETF Research Reports
 
SPDR-SP 500 TR (SPY): ETF Research Reports
 
SPDR-MATLS SELS (XLB): ETF Research Reports
 
SPDR-UTIL SELS (XLU): ETF Research Reports
 
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