Penn Wealth Publishing

2021.08.22 Penn Wealth Report Vol 9 Issue 03

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16 penn wealth Report volume 9 issue 03 22 aug 2021 Penn Wealth Report Copyright 2021. All Rights Reserved. investment intelligence ETF Spotlight e Materials Select Sector SPDR® e contents of this report reflect the personal views, opinions, and research of Penn Wealth Publishing. While measures are taken to help assure the accuracy of data, no guarantees can be made and the firm is not liable for any losses incurred by subscribers. is is not a solicitation to buy. Always consult your investment professional before investing any money. XLB @ $84 When we added the Materials Select Sector SPDR® ETF XLB $84 to the Penn Dynamic Growth Strategy last July, after years of underweighting the sector, one of the catalysts we mentioned in our notes was an expected reversion to the mean. After years of under- performing both in the domestic and global markets (see graph below), materials seemed ready to return to their place in the sun. After looking at the fund's undervalued holdings, the decision became a rela- tively easy one. While there are now a number of materials funds to choose from, we like XLB's size ($8B AUM), con- centrated holdings (29 as of this writing, as opposed to 117 in Vanguard's peer fund), and an ultra-low expense ratio of just thirteen basis points. It is also one of the older materials ETFs, opening its doors to investors back in 1998. According to its prospectus, this fund is designed to provide "precise exposure to companies in the chemical, construction material, containers and packaging, metals and mining, and paper and for- est products industries." Not only are we bullish on those industries going forward, the concentrated nature of the fund allows for the "cherry-picking" of the best companies within the respective segments. Indeed, bulwarks make up the list of top holdings. Courageous bets on deep value companies. e fact that XLB holds just 29 names is a good indi- cator that the fund is willing to make bold bets, but drill down a little deeper and this becomes evident. Were all 29 positions equal-weighted, they would each represent about 3.5% of the portfolio. e fund's top holding, however, carries a hefty 15.83% weighting. at company is British specialty chem- icals firm Linde PLC LIN $310 , the largest industrial supplier of gas in the world, with operations in over 100 countries. A bullish play on a rebound in global economic activity, the $90 billion merger of equals between Linde and Praxair means the juggernaut will dominate the hydrogen power market. Hydrogen- powered vehicles emit zero emissions, and the market for these fuel cells is expected to mushroom by the mid-2020s. American paint icon Sherwin-Williams SHW $305 is another hefty fund holding, at 7%. e largest pro- vider of architectural paint in the United States, the continued housing rebound will keep this company firmly in the green. With a gross profit margin of 47% and an operating margin of 16% (TTM), the company's financial health is on solid footing. Yet, a mention of Sherwin-Williams to a tech-chaser would be met with a yawn—another reason we like it. A mere six positions in XLB command a whopping 50% of the fund's weighting. In most cases, that would make us nervous. However, we have followed this fund from its inception 23 years ago, and it has proven to be a robust way to play the materials sector. Note: that does not mean it has always been a good time to own the materials sector. Right now, however, the stars seem to be aligning for a sector comeback. We added XLB to the Dynamic Growth Strategy (our ETF portfolio) as a satellite posi- tion on 16 Jul 2020 @ $60.67 per share. It doesn't always make sense to take a stand in materials; but when it does, this fund has always proven to be effective.

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