Materials ETF Helps You Benefit From Boom

Sector selection has been a big topic lately, as the market diverges, with sectors such as financials and homebuilders way down, while other sectors soar.

Both materials and energy have been the poster children for success through both the bull market that ended last fall and the most recent bear phase, as demand and prices for oil and commodities have been going up, and may go higher regardless of the fundamental reality.

The Materials Sector SPDR (XLB Quote) might be a way to benefit from the boom. Based on average volume of 10.9 million shares, the Street seems to agree and why not, over the last two years XLB is up 20% while the S&P 500 has been flat.

Unfortunately XLB, while it has been a good way to add performance versus a broad index like the S&P 500, has not really been a great way to capture the materials sector.

What has been behind the move in materials? Increased global demand for natural resources but unfortunately XLB is far heavier in chemical companies like DuPont(DD Quote) than purer resource companies.

Chemical companies are often consumers of natural resources so as the price of oil and other commodities have risen this has caused input prices to rise. Obviously a higher cost of doing business creates a drag on operating results.

The better performance during the commodity renaissance has come from, mostly foreign, mining stocks or thought of another way the companies that benefit from those higher input costs. This is where the iShares S&P Global Materials Sector Index Fund(MXI Quote) comes in. XLB is domestic stocks only and as mentioned mostly from chemical sub-sector. MXI only allocates 20.34% to the US and the vast majority of stocks are from the mining group.