Examples of companies in this sector: Du Pont, BASF, Dow Chemical, Newmont Corporation, Steel Dynamics, Alcoa, WestRock.
The most popular ETFs of the sector: Vanguard Materials ETF (ticker: VAW), Market Vectors TR Gold Miners (GDX), Materials Select Sector SPDR (XLB).
Many eggs, many baskets. How the exchange-traded funds work
The sector consists of companies involved in the extraction of raw materials and their primary processing. This does not include hydrocarbon producers: that is the prerogative of the Energy sector.
The Commodities sector is the smallest in the U.S. market: it occupies just over 2% of the S&P 500 capitalization. By comparison, the commodities sector accounts for about 15% of our RTS Index.
Companies in the commodities sector are involved in metals, chemicals and forestry, and their typical products are fertilizers, plastics, paints, adhesives, concrete, aluminum and wood. These are actively used materials in construction that other industries rely on. Therefore, the sector is highly correlated with the construction industries. This sector is also highly dependent on price quotations on commodity exchanges.
There are five industries in the commodities sector.
Chemical products, namely the following sub-industries:
Plastics, synthetics, petrochemicals.
Special additives, adhesives, coatings, polymers.
Fertilizers, pesticides and other agricultural chemicals.
Industrial gases such as nitrogen, hydrogen, helium.
Other chemicals.
Materials for building: cement, sand, bricks, lime, gypsum.
Packaging: bottles, metal cans, cardboard boxes, caps, corks, etc.
Paper and wood products, except paper packaging: this belongs to the previous category.
Mining. The exploration, extraction, and primary processing of metals and minerals:
Aluminum ore, aka bauxite.
Salts, phosphates, base metals-copper, lead, nickel, titanium, and zinc. Phosphates are used in the manufacture of fertilizers and cleaning products.
Precious metals and minerals, including platinum, gold, and silver.
Steel, including the mining of coking coal used in steel production.
The commodities sector is sensitive to the stages of the business cycle, so you need to keep an eye on the PMI. The sector performs best late in the cycle. During a recession, it falls like everyone else, but it does not show a clear pattern because of its disparate nature.
On the one hand, many sub-industries, like metals, react painfully to the industrial downturn, but on the other hand, some chemical and packaging sub-industries are woven into the defensive sector processes: Consumer Staples, Healthcare. Let’s also not forget the classic defensive asset, gold.
Energy, oil and gas sector.
Examples of companies in this sector: Exxon Mobil, PetroChina, Royal Dutch Shell, Chevron, Total.
The most popular ETFs: Energy Select Sector SPDR (XLE), Alerian MLP ETF (AMLP), Vanguard Energy ETF (VDE).
The oil and gas sector includes companies involved in the exploration, production, primary refining, transportation, and storage of oil, gas, and other consumable fuels. As well as companies that offer related services and drilling equipment. Oil and gas accounts for about 51% of the RTS Index.
Two industries stand out in the sector:
Equipment and Services.
Oil, gas and other energy products.
Society cannot function without fuel, so the price of oil correlates strongly with inflation and is often its main driver. Conversely, once the purchasing power of money weakens, the value of tangible assets such as real estate, commodities, and hydrocarbons increases.
Oil and gas stocks are a natural hedge against inflation. It is a good balancing tool for a portfolio with a large number of high-dividend stocks and fixed-coupon bonds.
Historically, the oil and gas sector is one of the worst performers early in the business cycle when the economy is just recovering. This is due to low inflation and low commodity prices. And the sector performs best at the end of the business cycle.
During a recession, the commodity industries are the first to suffer. On the other hand, oil is a resource that lives by its own laws. There is a lot of politics, sentiment, and manipulation, so it is hard to predict. A military conflict can drive up the price, while a surplus of oil and an economic slowdown leads to a decline in price, which is what we are witnessing now.
It would seem that such a strategic raw material should be as stable and predictable as possible, but in practice it is very volatile: the price of a barrel from $20 in 1999 rose to $140 by 2008, and in a year fell to $50. At the beginning of 2020 we once again witnessed an almost twofold drop in price.