Equity mutual funds in the materials sector, sometimes referred to as the basic materials sector, focus on companies involved in the processing, harvesting or manufacturing of minerals, metals, forests, chemicals, plastics and other natural resources. The basic materials sector is sensitive to fluctuations in supply and demand because the price of raw materials, such as gold or other metals, is usually driven by demand.
There is some crossover between basic materials and the utilities or energy sectors. The major difference is that the materials sector is primarily concerned with the early-stage processing of raw materials and does not usually produce products that go to consumers.
Here, we take a look at three equity mutual funds in the materials sector: Vanguard Materials Index Fund Admiral Shares (NASDAQ: VMIAX), Fidelity Select Chemicals Portfolio Fund (NASDAQ: FSCHX) and Fidelity Select Materials Portfolio Fund (NASDAQ: FSDPX). All information was accurate as of Oct. 2, 2018.
Vanguard Materials Index Fund Admiral Shares
Net assets: $3.20 billion
Expense ratio: 0.10%
Easily the best true index fund in the basic materials category, the Vanguard Materials Index Fund Admiral Shares is cheaper than most of its competitors by a factor of 10 and packs above-average returns across three-year, five-year and 10-year periods. Morningstar gives a four-star rating to this fund, which began on Feb. 11, 2004.
This mutual fund tracks the performance of the Morgan Stanley Capital International (MSCI) U.S. Investable Market Materials 25/50 Index, which is made up of large, medium and small U.S. companies in the materials sector. To be included, a stock need only be classified as materials by the Global Industry Classification Standard (GICS).
Fidelity Select Chemicals Portfolio Fund
Net assets: $1.53 billion
Expense ratio: 0.77%
The Fidelity Select Chemicals Portfolio Fund, which began on July 29, 1985, focuses on a subset of the materials sector. Fees are low and the asset base is large, so there's little risk of closure or capital flight to more efficient mutual funds. According to Morningstar, the Fidelity Select Chemicals Portfolio Fund ranks in the top 1% of the category for three-year, five-year and 10-year periods. The Fidelity Select series management is well-respected in the industry, and this fund earns a five-star rating from Morningstar.
Fidelity Select Materials Portfolio Fund
Net assets: $1.52 billion
Expense ratio: 0.79%
An excellent international option in the materials fund space is the Fidelity Select Materials Portfolio Fund, a below-average risk and below-average cost mutual fund with above-average lifetime returns for the category. The fund was started on Sept. 29, 1986.
Of the 129 funds in the natural resources/basic materials category, the Fidelity Select Materials Portfolio is perhaps one of the most diverse without losing its focus. About 92% of fund assets are in basic material equities, and the rest falls into the consumer cyclical, industrials and energy categories. There are more mid-size companies than large companies in the holdings, although there are far fewer small companies compared to the category average. The overall tilt is upper-middle or lower-large capitalization companies, and there is a value element in the holdings. Morningstar gives this fund a four-star rating.