Materials Sector 2Q17: Best and Worst

The Materials sector ranks seventh out of the ten sectors as detailed in our 2Q17 Sector Ratings for ETFs and Mutual Funds report. Last quarter, the Materials sector ranked eighth. It gets our Dangerous rating, which is based on an aggregation of ratings of 10 ETFs and 11 mutual funds in the Materials sector as of April 10, 2017. See a recap of our 1Q17 Sector Ratings here.

Figure 1 ranks from best to worst all ten Materials ETFs and Figure 2 shows the five best and worst rated Materials mutual funds. Not all Materials sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 25 to 125). This variation creates drastically different investment implications and, therefore, ratings.

Investors should not buy any Materials ETFs or mutual funds because none get an Attractive-or-better rating. If you must have exposure to this sector, you should buy a basket of Attractive-or-better rated stocks and avoid paying undeserved fund fees. Active management has a long history of not paying off.

Our robo-analyst technology empowers our unique ETF and mutual fund rating methodology, which leverages our rigorous analysis of each fund’s holdings. We think advisors and investors focused on prudent investment decisions should include analysis of fund holdings in their research process for ETFs and mutual funds.

Figure 1: ETFs with the Best & Worst Ratings – Top 5

* Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5

* Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

Fidelity MSCI Materials Index ETF (FMAT) is the top-rated Materials ETF and Vanguard Materials Index Fund (VMIAX) is the top-rated Materials mutual fund. Both earn a Neutral rating.

VanEck Vectors Steel ETF (SLX) is the worst rated Materials ETF and Rydex Basic Materials Fund (RYBMX) is the worst rated Materials mutual fund. Both earn a Very Dangerous rating.

160 stocks of the 3000+ we cover are classified as Materials stocks.

The Danger Within

Buying a fund without analyzing its holdings is like buying a stock without analyzing its business and finances. Put another way, research on fund holdings is necessary due diligence because a fund’s performance is only as good as its holdings’ performance. Don’t just take our word for it, see what Barron’s says on this matter.

PERFORMANCE OF HOLDINGs = PERFORMANCE OF FUND

Analyzing each holding within funds is no small task. Our robo-analyst technology enables us to perform this diligence with scale and provide the research needed to fulfill the fiduciary duty of care. More of the biggest names in the financial industry (see At BlackRock, Machines Are Rising Over Managers to Pick Stocks) are now embracing technology to leverage machines in the investment research process. Technology may be the only solution to the dual mandate for research: cut costs and fulfill the fiduciary duty of care. Investors, clients, advisors and analysts deserve the latest in technology to get the diligence required to make prudent investment decisions.

Figures 3 and 4 show the rating landscape of all Materials ETFs and mutual funds.

Figure 3: Separating the Best ETFs From the Worst ETFs

Sources: New Constructs, LLC and company filings

Figure 4: Separating the Best Mutual Funds From the Worst Mutual Funds

Sources: New Constructs, LLC and company filings

This article originally published on April 10, 2017.

Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector or theme.

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