- The Natural Resource sector, also know as the Basic Materials sector has provide outstanding performance over the last 20 years
- The oldest ETF in this sector has outperformed an S&P 500 index fund by 1.02% CAGR since its’ inception date
- There are currently 31 ETFs available in the Natural Resources category. 14 of these ETFs have been available for 10 years or longer
Investopedia defines the Natural Resources sector this way: The basic materials sector is a category of stocks for companies involved in the discovery, development, and processing of raw materials. The sector includes companies engaged in mining and metal refining, chemical products, and forestry products. This sector has performed very well over the last 20 years. The Materials Select Sector SPDR® Fund (XLB) has an inception date of 12/16/1998. XLB is the oldest available ETF in this category. Since it’s inception date, it has outperformed an S&P 500 index fund by 1.02% CAGR. That’s a 78.47% greater gain in XLB than in the SPY ETF over 20 years. (See charts below)
XLB vs S&P 500 index fund: January 1999 – February 2019
Source: https://www.portfoliovisualizer.com/
XLB vs SPY: December 22, 1998 – March 24, 2019
Source: https://www.koyfin.com/home
Morningstar currently shows 31 ETFs in the Natural Resources category. Of those 31 ETFs, 14 have been available for 10 years or longer. I have compared the long-term performance of each of these older ETFs head-to-head. With these comparisons I have ranked all 14 in the chart below. Long-term performance was the only factor used in the rank order. I did not consider valuations, liquidity, diversification or investor suitability. Potential investors should perform their own due diligence before investing.
Source: https://www.morningstar.com/
The top 4 long-term performing Natural Resources ETFs were FXZ, PYZ, RTM and VAW. The following chart shows how these 4 ETFs performed against each other over the last 12 years.
FXZ vs PYZ vs RTM vs VAW: June 2007 – February 2019
Source: https://www.portfoliovisualizer.com/
Now, let’s see how these 4 ETF’s portfolios are constructed by looking at their stated objectives and product details.
FXZ – The First Trust Materials AlphaDEX® Fund is an exchange-traded fund. The investment objective of the Fund is to seek investment results that correspond generally to the price and yield, before fees and expenses, of an equity index called the StrataQuant® Materials Index. The StrataQuant® Materials Index is an “enhanced” index developed, maintained and sponsored by ICE Data Indices, LLC or its affiliates (“IDI”) which employs the AlphaDEX® stock selection methodology to select stocks from the Russell 1000® Index. IDI constructs the StrataQuant® Materials Index by ranking the stocks which are members of the Russell 1000® Index on growth factors including three, six and 12-month price appreciation, sales to price and one-year sales growth, and, separately, on value factors including book value to price, cash flow to price and return on assets. Stocks which Russell has classified solely as growth or value, receive their score using the above growth or value factors respectively. Stocks which Russell allocates between both growth and value receive their best score between the growth and value factors. IDI then ranks those stocks contained in the materials sector according to their score. The bottom 25% is eliminated and the top 75% is selected for the StrataQuant® Materials Index. The selected stocks are divided into quintiles based on their rankings and the top ranked quintiles receive a higher weight within the index. The stocks are equally-weighted within each quintile. The index is reconstituted and rebalanced quarterly. (BEST LONG-TERM PERFORMANCE, LOWEST P/B & P/E RATIOS)
PYZ – The Invesco DWA Basic Materials Momentum ETF (Fund) is based on the Dorsey Wright® Basic Materials Technical Leaders Index (DWA Basic Materials Technical Leaders Index). The Fund will normally invest at least 90% of its total assets in the securities that comprise the Index. The Index is designed to identify companies that are showing relative strength (momentum) and is composed of at least 30 securities from the NASDAQ US Benchmark Index. Relative strength is the measurement of a security’s performance in a given universe over time as compared to the performance of all other securities in that universe. The Fund and the Index are rebalanced and reconstituted quarterly.
RTM – The Invesco S&P 500® Equal Weight Materials ETF (Fund) is based on the S&P 500® Equal Weight Materials Index (Index). The Fund will invest at least 90% of its total assets in common stocks that comprise the Index. The Index equally weights stocks in the materials sector of the S&P 500® Index. The Fund and the Index are rebalanced quarterly. (BEST SINGLE-YEAR & 5-YEAR PERFORMANCE, LOWEST DRAWDOWNS)
VAW – Vanguard Materials ETF seeks to track the performance of a benchmark index that measures the investment return of materials stocks. Seeks to track the performance of the MSCI US Investable Market Materials 25/50 Index. Multicapitalization equity in the materials sector. The fund employs a passively managed, full-replication strategy when possible. If regulatory constraints prevent full replication, the fund uses a sampling strategy to approximate the index’s key characteristics. The fund remains fully invested. Low expenses minimize net tracking error. The MSCI US Investable Market Materials 25/50 Index includes stocks of U.S. companies within the materials sector. The sector is made up of companies in a wide range of commodity-related manufacturing industries, such as chemicals, construction materials, glass, paper, forest products, and related packaging products, as well as metals, minerals, mining companies, and producers of steel. Uses GICS methodology and clearly classified sectors. Offers broad representation of the target sector across large-, medium-, and small-cap companies. (LOWEST VOLATILITY, BEST 15-YEAR PERFORMANCE, HIGHEST AUM, HIGHEST DIVIDEND, LOWEST EXPENSE RATIO, MOST DIVERSIFIED, LOWEST TURNOVER RATIO)
The Natural Resources sector has been a profitable way to diversify an equity portfolio. The top 3 funds in this category have less than 0.50% difference in long-term CAGR results. Knowing this, potential investors may want to consider expense ratios and/or whether your brokerage provides commission-free trading on the fund they are considering investing in.
Thank you for taking time to read this article. If you found it useful, please share it with a friend.
Respectfully yours, Micah McDonald, aka the Deep Value ETF Accumulator
Disclosure: We own shares of FXZ, and we intend to buy more shares in the future. Our brokerage allows commission-free trading on this ETF. I am not a professional investment advisor. Please perform your own due diligence or seek assistance from a Registered Investment Advisor prior to investing in any fund mentioned in this article.
Previous Deep Value ETF Accumulator article on the Miscellaneous Sector category: MAY 21, 2018 Best Long-Term Performance Natural Resources (Basic Materials) Sector ETFs 1.1