| Sector
SPDR’s - Lowering your Portfolio Volatility
 Need
a bit less spice in your portfolio?
 Over
the last decade, the American Stock Exchange (AMEX) has constructed a series
of Exchange Traded Funds (ETF’s) that have garnered significant investor
interest. With more than 100 of these market proxies available, the asset
base represented by these vehicles tops $100 billion. One that came across
our radar screen is the family of ETF’s called SPDR’s-- pronounced ‘Spiders’
by those in the know.
SPDR’s are a group of nine industry
specific ETF’s that collectively represent all the stocks in the S&P
500. As with our old favorite, the NASDAQ 100 tracking index (NASDAQ:
QQQ), SPDR’s represent an alternative to straight stock ownership,
one that evidently appeals to a large and growing sector of investors.
Dull is Good
As the market pulls itself out of
the quagmire in which it has roiled over the last several years, one of
these SPDR’s warrants discussion: the Materials Select Sector ETF (AMEX:
XLB). Although there are other SPDR’s that track the securities
in sectors such as Technology, Health Care, Financial and Consumer Durables
to name a few, the names in the Materials Select should be of interest
to investors who want exposure to those big companies that can be expected
to eventually participate in a market. Hardly sexy, XLB represents quick
and liquid exposure to a sector of the market that, historically, represents
great value.
 The
current top ten holdings of the XLB are ones we are all familiar with
but, frankly, rarely hear about. They are:
1. Du Pont E I De Nemours + Co
17.19%
2. Dow Chem Co 11.75%
3. Alcoa Inc 8.93%
4. International Paper Co 7.09%
5. Weyerhaeuser Co 4.64%
6. Newmont Mng Corp 4.60%
7. Praxair Inc 4.09%
8. Air Prods + Chems Inc 3.96%
9. PPG Inds Inc 3.61%
10. Rohm + Haas Co 2.89%
A bit dull? Perhaps. But dull or
not, remember that these are global corporate leaders—like, forever.
Cheap, Cheerful and Liquid
As with Mutual Funds, SPDR’s distribute
income. In 2002, shareholders received 45 cents a share; 20 cents so far
in the first half of 2003. Not a huge deal yield-wise as XLB shares trade
at $21.65, but better than a stick in the eye. As well, the shares have
moved up almost 30 percent since March.
The key with XLB, as with all ETF’s
is that they act and trade like shares as opposed to owning high cost,
subjectively managed Mutual Funds. Heck, you can even short SPDR’s as they
are exempt from the uptick rule, which stops aggressive shorting of individual
stocks in a volatile market.
Liquidity is the magic of ETF’s.
XLB is one of the smaller of the sector SPDR’s, but it nonetheless boasts
assets of nearly $400 million. The 52-week low was $16.50 and currently
trade at $21.65. XLB peaked during the last bull at $28 and has put in
a series of lower lows and higher highs since it bottomed in March 2003.
XLB is rebounding off of a recent pulback, but has broken out once again
and still appears to be in a solid uptrend. A test of the May 2002 high
of 24.45 is highly likely over the next 6 months.
Volume has picked up as well during
that period, evidencing a renewed interest in this widely ignored sector
of the market.
Funny how the quality companies,
or at least those with long-term staying power, tend to get less attention
while the eBay’s and Amazon’s of the world seem to be repeating past trends
–fast-tracking themselves to gross overvaluations.
Get familiar with SPDR’s and the
sectors that they represent. Even for die-hard small cap players, the large
cap exposure may provide a decent offset or diversification to the higher
beta area of a portfolio.
Got questions or comments? Send 'em
here: editor@smallcapdigest.net
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