XLB ETF: Your Under-the-Radar Gateway to Rising Commodity Stocks

It’s not as classic or as common as peanut butter and jelly, but the idea of participating in rising commodity prices through an ETF that owns commodity stocks is pretty tasty. In a strictly financial sense, that is. For 27 years, an ETF has tracked the stocks within the S&P 500 which provide some degree of access to that concept.

The Materials Select Sector SPDR Fund (XLB) is one of the 11 “sector Spiders,” which started trading at the end of 1998, just five years after the first ETF (SPY) debuted. At $5.6 billion in assets, XLB is the smallest of that group, about 25% smaller than the next smallest sector Spider (XLRE, which tracks Real Estate stocks).

That should not come as a shock to traders, since the Basic Materials sector is just a blip on the radar within the S&P 500 index. At a mere 1.7%, it is 1/20th the size of the tech sector. XLB contains only 25 stocks. So in the equal-weighted version of the S&P 500 (ticker RSP), it still only accounts for 4% of that index.

So, we’re talking small here. But that means nothing when it comes to making money, especially in a market environment where it seems the S&P 500 has shrunk in importance to perhaps 10-20 stocks. For instance, Palantir (PLTR) has rocketed up in its brief history as a publicly traded company to now be the 25th largest S&P 500 holding by weight, at $335 billion in market cap. But Linde plc (LIN), the biggest stock holding in XLB, at nearly 16% of that ETF’s assets, is only ⅔ the size of PLTR.

All of this helps provide XLB with a far less mega-cap feel. That, and stubborn inflation trends, plus market concerns about commodity prices related to tariff policy, combine to make XLB a potential hiding spot, if not a future core position for some.

However, these stocks tend to follow closely the price trends of their underlying commodities. Here’s XLB’s industry allocation.

Source: SSGA

And that has led to highly-inconsistent behavior on the part of XLB, as shown below. A one-year range as high as 80% and as low as 20% over the past 10 years. However, XLB is right near the bottom of its typical range, making this a potentially strong setup.

Naturally, as with any diversified ETF, the stocks themselves will dictate the performance of the fund. As with most of the sector Spiders, XLB is quite top-heavy. The top eight holdings comprise about 50% of assets. So as those stocks go, so goes XLB.

Source: SSGA

XLB offers something many sectors currently do not. Namely, long-term projected earnings growth within shouting distance of its forward P/E Ratio. In this case, 10% earnings are expected, and it sells at about 21x.

Source: SSGA

Source: SSGA

The daily price chart (not shown) looks a bit stretched, but the weekly (below) doesn’t. It looks to be gaining some momentum.

XLB: checks the right boxes for me

XLB is one of those situations of the type traders should be looking out for. It is not a headline-grabber, but it is slowly coming into form again. And if investors begin looking around the US stock market in search of something smaller, less-obvious and reasonably valued, they might just end up here, with XLB. Commodity investors who are intrigued by the stock market may find some familiarity here, since the underlying business is commodity-related.

On my proprietary Reward Opportunity And Risk (ROAR) grading system, XLB checks in at 70. That means I judge it to have a 70% chance of its next 10% move being up, and a 30% chance that move is down. That’s on the border of my top “green” rating level, which starts at 70.

This ETF has a reasonable valuation, an above-average technical picture, and the type of “off the radar” sentiment component I like. Because while commodities like gold, oil and gas and others are constantly talked about by traders, the stocks that produce those commodities tend to exist in the shadows at times like now. This contrarian smells an opportunity over a 6-12 month time frame.

So naturally, determining if your own portfolio should have exposure is something better analyzed before the masses catch on. After all, that’s been a pretty good way to make money.