Fidelity MSCI Materials Index ETF (FMAT): Dashboard For July

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This monthly article series shows a dashboard with aggregate industry metrics in materials. It is also a top-down analysis of sector ETFs like the Materials Select Sector SPDR ETF (XLB) and the Fidelity MSCI Materials Index ETF (NYSEARCA:FMAT), whose largest holdings are used to calculate these metrics.

Shortcut

The next two paragraphs in italic describe the dashboard methodology. They are necessary for new readers to understand the metrics. If you are used to this series or if you are short of time, you can skip them and go to the charts.

Base Metrics

I calculate the median value of five fundamental ratios for each industry: Earnings Yield (“EY”), Sales Yield (“SY”), Free Cash Flow Yield (“FY”), Return on Equity (“ROE”), Gross Margin (“GM”). The reference universe includes large companies in the U.S. stock market. The five base metrics are calculated on trailing 12 months. For all of them, higher is better. EY, SY and FY are medians of the inverse of Price/Earnings, Price/Sales and Price/Free Cash Flow. They are better for statistical studies than price-to-something ratios, which are unusable or non available when the “something” is close to zero or negative (for example, companies with negative earnings). I also look at two momentum metrics for each group: the median monthly return (RetM) and the median annual return (RetY).

I prefer medians to averages because a median splits a set in a good half and a bad half. A capital-weighted average is skewed by extreme values and the largest companies. My metrics are designed for stock-picking rather than index investing.

Value and Quality Scores

I calculate historical baselines for all metrics. They are noted respectively EYh, SYh, FYh, ROEh, GMh, and they are calculated as the averages on a look-back period of 11 years. For example, the value of EYh for packaging in the table below is the 11-year average of the median Earnings Yield in packaging companies.

The Value Score (“VS”) is defined as the average difference in % between the three valuation ratios (EY, SY, FY) and their baselines (EYh, SYh, FYh). The same way, the Quality Score (“QS”) is the average difference between the two quality ratios (ROE, GM) and their baselines (ROEh, GMh).

The scores are in percentage points. VS may be interpreted as the percentage of undervaluation or overvaluation relative to the baseline (positive is good, negative is bad). This interpretation must be taken with caution: the baseline is an arbitrary reference, not a supposed fair value. The formula assumes that the three valuation metrics are of equal importance.

Current data

The next table shows the metrics and scores as of last week’s closing. Columns stand for all the data named and defined above.

VS

QS

EY

SY

FY

ROE

GM

EYh

SYh

FYh

ROEh

GMh

RetM

RetY

Chemicals

5.59

-5.59

0.0498

0.4716

0.0225

17.08

39.96

0.0438

0.4596

0.0224

17.93

42.69

-5.14%

-7.53%

Constr. Materials

36.29

48.71

0.0566

1.0238

0.0316

19.13

29.84

0.0282

0.9016

0.0334

9.91

28.58

-0.41%

-16.76%

Packaging

-7.68

12.76

0.0575

1.0746

0.0203

23.18

23.68

0.0476

1.0594

0.0371

17.62

25.21

-2.66%

-15.06%

Mining/Metals

26.05

91.30

0.1106

1.5176

-0.0060

22.42

24.28

0.0402

1.1659

0.0221

8.48

20.52

-11.80%

-17.68%

Value and Quality chart

The next chart plots the Value and Quality Scores by industry (higher is better).

Value and quality in materials

Value and quality in materials (Chart: author; data: Portfolio123)

Evolution since last month

The most notable change is an improvement of value score in mining/metals.

Variations in value and quality in materials

Variations in value and quality (Chart: author; data: Portfolio123)

Momentum

The next chart plots momentum data.

Momentum in materials sector

Momentum in materials (Chart: author; data: Portfolio123)

Interpretation

Construction materials and mining are undervalued by about 36% and 26% relative to 11-year averages. Moreover, they have excellent quality scores. The chemical industry is close to the historical baseline in both value and quality. Packaging is slightly overvalued (by about 8%), which may be justified by a good quality score.

Focus on FMAT

The Fidelity MSCI Materials Index ETF (FMAT) has been tracking the MSCI US IMI Materials 25/50 Index since 10/21/2013. It has a total expense ratio of 0.08%: it is a bit cheaper than VAW, which tracks the same index for 0.10%, and XLB, which tracks a large cap only index for 0.12%.

The fund has 128 holdings. The next table lists the top 10 names with basic ratios and dividend yields. Their aggregate weight is 47.8%.

Ticker

Name

Weight

EPS growth %TTM

P/E TTM

P/E fwd

Yield%

LIN

Linde plc

13.49%

41.27

35.64

23.22

1.69

SHW

Sherwin-Williams Co.

5.07%

-10.83

35.70

26.15

0.98

APD

Air Products and Chemicals Inc.

4.88%

15.81

23.04

21.92

2.88

NEM

Newmont Corporation

4.35%

-58.63

41.47

17.15

4.02

FCX

Freeport-McMoRan Inc.

3.90%

182.14

7.48

7.84

1.16

ECL

Ecolab Inc.

3.63%

185.27

40.47

30.81

1.31

CTVA

Corteva Inc.

3.60%

73.71

22.28

20.69

1.08

DOW

Dow Inc.

3.47%

249.44

5.40

6.24

5.65

IFF

International Flavors & Fragrances Inc.

2.78%

17.67

53.29

20.08

2.72

DD

DuPont de Nemours Inc.

2.61%

-47.67

18.25

16.29

2.42

FMAT and VAW share the same underlying index and have almost identical annualized returns since FMAT inception: 7.46% vs. 7.47%. Their maximum drawdown and volatility are also similar. As VAW is almost 10 years older, I will use it to assess FMAT index on a longer period.

VAW index has beaten XLB by a short margin of 42 bps in annualized return since inception. Their risk-adjusted performances are identical (Sharpe ratio in the table below).

since Feb. 2004

Total return

Annualized return

Max Drawdown

Sharpe ratio

Volatility

FMAT index (VAW)

358.56%

8.60%

-62.44%

0.43

21.40%

XLB

326.42%

8.18%

-59.66%

0.43

20.34%

Data calculated with Portfolio123

In summary, FMAT is a good product for investors seeking capital-weighted exposure in basic materials. It currently holds 128 stocks including large, mid- and small caps, whereas XLB has only 30 holdings in large companies. Buy-and-hold investors may prefer FMAT for its cheaper management fees, whereas liquidity makes XLB a better instrument for tactical allocation and swing trading. Investors who are concerned by risks related to the top holding weight (over 13%) may prefer the Invesco S&P 500 Equal Weight Materials ETF (RTM).

Dashboard List

I use the first table to calculate value and quality scores. It may also be used in a stock-picking process to check how companies stand among their peers. For example, the EY column tells us that a chemical company with an Earnings Yield above 0.0498 (or price/earnings below 20.08) is in the better half of the industry regarding this metric. A Dashboard List is sent every month to Quantitative Risk & Value subscribers with the most profitable companies standing in the better half among their peers regarding the three valuation metrics at the same time. The list below was sent to subscribers several weeks ago based on data available at this time.

X

United States Steel Corp.

CLF

Cleveland-Cliffs Inc.

LYB

LyondellBasell Industries N.V.

DOW

Dow Inc.

FCX

Freeport-McMoRan Inc.

VRTV

Veritiv Corp.

UFPI

UFP Industries Inc.

CC

Chemours Co.

OI

O-I Glass Inc.

It is a rotating list with a statistical bias toward excess returns on the long-term, not the result of an analysis of each stock.

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