With many of the best funds in the sector up more than 5% for the year, the basic materials sector is a leader in 2015 and that positive momentum may continue for the foreseeable future.
But what exactly are basic materials and which are the best funds for tapping them?
Sometimes categorized as natural resources, the basic materials sector is a category of stocks in companies that are involved in the discovery, development and processing of raw materials. Mutual funds and ETFs investing in the sector often have portfolios concentrating in commodity-based industries such as energy, chemicals, minerals, forest products and miners of precious metals.
Because the sector supplies materials for construction, the performance of basic materials sector funds is largely dependent on a strong economy. Therefore, the basic materials sector is very much a cyclical one.
With that said, here are three of the best funds for tapping a late-cycle resurgence of the basic materials sector.
3 Best Funds for Tapping Basic Materials: Vanguard Materials ETF (VAW)
Passively-managed index funds and ETFs are an effective way to get broad exposure to sectors. Therefore, the Vanguard Materials ETF (NYSEARCA:VAW) is an outstanding choice.
One of the cheapest and most comprehensive U.S. materials-sector exchange-traded funds available, Vanguard Materials ETF owns nearly every publicly traded materials company based in the United States.
The portfolio for VAW consists of nearly 100% of stocks in United States companies, which makes this ETF poised to take full advantage of cyclical play in basic materials for a growing U.S. economy. Top holdings include big names like E I Du Pont Nemours and Co (NYSE:DD), Monsanto Company (NYSE:MON) and Dow Chemical Co (NYSE:DOW).
The Vanguard Materials ETF is also a consistent top performer in the natural resources category with performance ranks solidly in the top quartile for one-, three-, five- and 10-year returns.
It’s also tough to beat the rock-bottom expense ratio of 0.12%, which is only $12 for every $10,000 invested.
3 Best Funds for Tapping Basic Materials: Materials Select Sector SPDR (XLB)
If you’re looking for the most liquid basic materials sector ETF on the market, Materials Select Sector SPDR (NYSEARCA:XLB) is the fund for you.
This ETF holds every materials company included the S&P 500, which includes companies in chemicals, metals and mining, paper and forest products, containers and packaging, and construction materials industries.
As for performance, the short-, intermediate- and long-term returns all rank from top third to top 10% among other funds in the natural resources category. It was the best performer in the category in 2014, and for the year has a price gain of 6%, placing it ahead of 80% of category peers.
Like other top performers in the group of basic materials funds, XLB has a low expense ratio of 0.15%, or just $15 for every $10,000 invested.
3 Best Funds for Tapping Basic Materials: Fidelity MSCI Materials (FMAT)
The Fidelity MSCI Materials (NYSEARCA:FMAT) is a relative newcomer to the basic materials sector of fund offerings, but its passive, diversified, low-cost structure makes it a compelling choice.
The fund’s underlying index is the MSCI USA IMI Materials Index, which represents the performance of the materials sector in the U.S. equity market. FMAT uses “representative sampling” indexing strategy, which is something like it sounds: The fund may or may not hold 100% of the securities in the benchmark index but it seeks to provide investment returns, after fees and expenses, that are similar to it.
In 2014, its first full calendar year since inception in 2013, the fund’s return of 5.7% beat 90% of the funds in the natural resources category.
The dirt-cheap expense ratio of 0.12% helps round out FMAT’s attractive qualities.
As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.