XLB ETF: Good Credentials, But Not A Good Buy Now

seekingalpha08-02

XLB, a well-established ETF focusing on material stocks in the S&P 500, has underperformed the diversified bellwether this year.We measure XLB's qualities against its closest peer - VAW and feel it is...

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Jonathan Kitchen Introduction The Material Select Sector SPDR Fund  is a well-established passively managed product that focuses on the material stocks that comprise the S&P500. This +25-year-old ETF covers material stocks that are exposed to a range of sub-industries, notably chemicals, packaging material, containers, construction material, paper, mining and forest products. So far, on a YTD basis, XLB has hardly set the world alight, delivering less than 9% returns, and trailing the equity bellwether by 700bps.   YCharts Is XLB a good enough proxy to tap the material sector, and could the ETF have a stronger H2 and beyond?Well, here are a few thoughts which may abet your viewpoint on this product. Is XL","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"LU0963555726.SGD":"Blackrock European Fund A2 SGD-H","LU0506197887.SGD":"Janus Henderson Horizon Pan European Absolute Return A2 SGD-H","LU0505663152.USD":"abrdn SICAV I - FUTURE MINERALS \"A\" (USD) ACC","LU0069450319.EUR":"富达欧洲斯托克50指数 A-EUR","BK4504":"桥水持仓","LU0526926950.USD":"贝莱德欧洲基金","LU1064927863.SGD":"JPMorgan Funds - Europe Dynamic A (acc) SGD-H","SGXZ23171101.USD":"NIKKO AM SHENTON GLOBAL OPPORTUNITIES (USD) ACC","BK4006":"钢铁","LU0769137737.USD":"BGF CONTINENTAL EUROPEAN FLEXIBLE \"A2\" (USD) ACC","LU0347712357.USD":"BNP PARIBAS GLOBAL ENVIRONMENT \"C\" (USD) ACC","LU0171280430.USD":"BGF EUROPEAN \"A2\" (USD) ACC","BK4581":"高盛持仓","BK4532":"文艺复兴科技持仓","LU1815333072.USD":"THREADNEEDLE (LUX) GLOBAL FOCUS \"AUP\" (USD) INC","LU1978683503.SGD":"Blackrock Sustainable Energy A2 SGD-H","IE00B5TLWC47.USD":"BNY MELLON LONG-TERM GLOBAL EQUITY \"B\" (USD) ACC","LU0960981461.USD":"BNP PARIBAS EUROPE GROWTH \"C\" (USDHDG) INC","LU2413666004.HKD":"BNP PARIBAS AQUA \"CRH\" (HKDHDG) INC","BK4534":"瑞士信贷持仓","LU2413666699.HKD":"BNP PARIBAS GLOBAL ENVIRONMENT \"CRH\" (HKDHDG) INC","BK4101":"工业气体","LU2413665964.HKD":"BNP PARIBAS AQUA \"C\" (HKD) ACC","LU1988902786.USD":"FULLERTON LUX FUNDS GLOBAL ABSOLUTE ALPHA \"I\" (USD) ACC","LU2413666426.HKD":"BNP PARIBAS GLOBAL ENVIRONMENT \"C\" (HKD) ACC","BK4566":"资本集团","LU1165135440.EUR":"BNP Paribas Aqua Classic Cap EUR","BK4535":"淡马锡持仓","LU1989772840.SGD":"CPR Invest - Climate Action A2 Acc SGD-H","LU1355424745.HKD":"BGF EUROPEAN SPECIAL SITUATIONS \"A2\" (HKDHDG) ACC","LU1989772923.USD":"CPR Invest - Climate Action A2 Acc USD-H","XLB":"材料ETF","LU0353189680.USD":"富国美国全盘成长基金Cl A Acc","LU0061474960.USD":"天利环球焦点基金AU Acc","VAW":"Vanguard Materials ETF","BK4550":"红杉资本持仓","LIN":"Linde PLC","RS":"Reliance Steel & Aluminum Co","LU0234572021.USD":"高盛美国核心股票组合Acc","LU1804176565.USD":"EASTSPRING INV GLOBAL GROWTH EQUITY \"A\" (USD) ACC","LU0096362180.USD":"CT (LUX) I GLOBAL FOCUS \"DU\" (USD)","LU0124384867.USD":"贝莱德新能源基金A2","LU0353189763.USD":"ALLSPRING  US ALL CAP GROWTH FUND \"I\" (USD) ACC","LU1620156130.USD":"BNP PARIBAS AQUA \"C\" (USD) ACC","LU1543694498.USD":"法巴水资源基金RH MD Dis","LU2264538146.SGD":"Fullerton Lux Funds - Global Absolute Alpha A Acc SGD","FDN":"First Trust Dow Jones Internet I","LU1104425308.USD":"BNP PARIBAS EUROPE GROWTH \"C\" (USD) ACC"},"translate_title":"XLB ETF：资质良好，但现在不宜买入","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"XLB":1,"LIN":1,"FDN":1,"RS":1,"VAW":1,"ESmain":0.89,"VIXmain":0.89},"content_text":"XLB, a well-established ETF focusing on material stocks in the S&P 500, has underperformed the diversified bellwether this year.We measure XLB's qualities against its closest peer - VAW and feel it is the superior product.Yet, we don't feel XLB would be worth pursuing at this stage.   Jonathan Kitchen Introduction The Material Select Sector SPDR Fund (NYSEARCA:XLB) is a well-established passively managed product that focuses on the material stocks that comprise the S&P500. This +25-year-old ETF covers material stocks that are exposed to a range of sub-industries, notably chemicals, packaging material, containers, construction material, paper, mining and forest products. So far, on a YTD basis, XLB has hardly set the world alight, delivering less than 9% returns, and trailing the equity bellwether by 700bps.   YCharts Is XLB a good enough proxy to tap the material sector, and could the ETF have a stronger H2 and beyond? Well, here are a few thoughts which may abet your viewpoint on this product. Is XLB Better Than Close Peer - VAW? As things stand, XLB remains the largest ETF (AUM of $5.75bn) providing access to different segments of the broad material universe. However, the Vanguard Materials ETF (VAW) which came to the bourses 6 years after our focus ETF (XLB is also the oldest product in this space, having made its public debut in December 1998) isn’t too far behind, with AUM of over $4bn. Given the roughly similar sizes of these two products, we thought it would be apt to compare these two products and see which one comes out on top. If you’re mainly looking for narrow access to the notable material stocks that comprise the S&P500, then XLB should be your go-to play. Currently, you get access to 28 stocks from this terrain. If you’re looking for a larger pool of stocks, with more diversification and the desire of even getting some exposure to the smaller material stocks, then you should probably be inching towards VAW (although as we note later on in this section, spreading your bets across more material stocks including micro-caps, doesn’t necessarily reflect well from a risk-adjusted return basis) VAW which tracks the MSCI US Investable Market Index (IMI)/Materials 25/50 Index, provides some decent exposure towards small caps which comprise 17% of the portfolio, and even micro-caps which comprise 3% of the portfolio. On the other hand, XLB’s tracking index - The Materials Select Sector Index, refrains from engaging with stocks from the lower end of the market-cap (whilst small-caps account for just 2%), although it does tilt more heavily towards mid-caps (57%) than large-caps. Because it stays away from the risky component of the market (micro-caps), XLB’s overall rolling volatility profile is also lower than VAW’s profile.   YCharts Given that XLB only covers a little over two dozen stocks, there’s no surprise to discover that it comes across as very top-heavy, with the top 10 stocks alone accounting for two-thirds of the total portfolio. However, even VAW too appears to be quite top-heavy for a portfolio which covers over 4x the number of stocks as XLB; for context, even the former’s top 10 stake is rather hefty at 52%. Gauging the respective structures, we feel XLB just about edges VAW. Firstly, it is cheaper to own XLB, with an expense ratio of just 0.09% (VAW is not far behind at 0.1%). XLB is also an extremely stable portfolio, with its annual churn coming in at a miserly rate of just 3%. VAW’s corresponding turnover rate is 200bps more.   Seeking Alpha, Morningstar Even from an income perspective, XLB appears to be the more compelling offering. Based on how the current yield is relative to the respective 5-year averages, it would imply that both products aren’t great buys now, but yet note that XLB’s differential with its 5-year average is only around 8bps, whereas VAW’s differential is a lot more.   YCharts And whilst both products had quite similar yields until 2021 or so, note that XLB has been growing its payouts at a much faster pace, resulting in a much superior yield lately. For context, over the last 3 years, XLB’s dividends have grown at a CAGR of 9%, whereas VAW’s have grown at a slower pace of just 7%. Also, on a risk-adjusted return basis, it appears that XLB is the more competent product. Note that, whether it's over a 5-year basis or a 10-year basis, XLB does a better job of managing its total risk taken (as captured by the Sharpe ratio).   YCharts For further validation, also note how it copes better than VAW during periods of harmful volatility (as measured by the Sortino ratio), be it over 5 years or 10 years.   YCharts All things considered, it’s fair to say that XLB should be the preferred route to play US material stocks. Closing Thoughts - Is XLB A Good Buy Now? If you’re someone who takes credence in the theory of mean-reversion in the markets, it would appear that the material segment of the S&P500 has plenty of room to make up for lost ground.   YCharts A chart above captures the multi-decade relative strength (RS) trends of the material sector versus the broader S&P500 and here we can see that after peaking before the GFC era, the RS ratio has been on a consistent downward trend. Right now the current ratio is a good 26% below its long-term average, and does offer some scope for mean-reversion. Having said that, for XLB to mean-revert, one would need to a very compelling valuation narrative, and we don’t believe XLB necessarily offers that. As noted in the previous section, the product’s top 10 stocks will play a key role in this ETF’s fortunes, but do note that on a weighted average forward EV/EBITDA basis, these top stocks are currently trading at a multiple of 10.4x which translates to a 6% premium over its long-term average.   Seeking Alpha With the top holding - Linde PLC (LIN), an industrial gas specialist, which holds an inordinate weight of 21%, the valuation premium is twice as pronounced (13%). The other thing to note is that LIN will publish its Q2 results shortly, and it isn’t expected to be too resilient. For a while now, LIN has been witnessing negative base volumes, and management has suggested that they would prefer to be cautious until the end of the year. Even beyond LIN, it’s worth noting that other material stocks don’t offer the best earnings growth outlook. In fact, for the FY, there are only two sectors which are poised to deliver negative earnings, growth, and the material sector, with an expected decline of -2.2% is one of them.   Factset Given such a poor earnings outlook, would you be prepared to shed out a rather steep P/E of 21x, particularly as it is not too far away from the multiple that the S&P500 is priced at? Finally, if we look at XLB’s weekly movements over the last 3 years or so, we can see that it has taken the form of a rising wedge pattern which runs the risk of topping out at higher levels and reversing. Also, note that 2 out of the last 3 weekly candles have been long upside wick candles, suggesting some profit booking at higher levels . Even if you want to disregard that pattern, do note that trading the Bollinger bands (the two blue lines which serve as a function of the rolling volatility) would have served you well. Essentially buying XLB when the price drops closer to lower BB and selling it when it gets closer to the upper band (like it is on the cusp of doing so now) would have been a rewarding play.   Investing  In conclusion, we like XLB as a product, but we don’t believe it would make a good buy now.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2456445619"}