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 (VMIAX), Fidelity Select Chemicals Portfolio Fund (FSCHX), and Fidelity Select Materials Portfolio Fund (FSDPX). All information was accurate as of Oct. 7, 2020.
- Equity mutual funds in the materials sector focus on companies that process, harvest, or manufacture certain commodities and other natural resources.
- The Vanguard Materials Index Fund Admiral Shares is cheaper than most of its competitors.
- The Fidelity Select Chemicals Portfolio Fund has low fees and a large asset base.
- The Fidelity Select Materials Portfolio Fund provides investors with an excellent international option.
Vanguard Materials Index Fund Admiral Shares
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 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: $640.7 million
- Expense ratio: 0.78%
- Yield: 1.31%
The Fidelity Select Chemicals Portfolio Fund, which was established 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 the 15-year period and was also among the top 3% for the 10-year period. The Fidelity Select series management is well-respected in the industry. This fund received an overall rating of four stars from Morningstar out of 102 funds.
Unlike utilities and energy companies, those in the basic materials sector conduct early-stage processing of raw materials and don't produce products that go to consumers.
Fidelity Select Materials Portfolio Fund
- Net assets: $694.1 million
- Expense ratio: 0.80%
- Yield: 1.20%
An excellent international option in the materials fund space is the Fidelity Select Materials Portfolio Fund. This fund is a below-average cost mutual fund. According to Morningstar, this fund has an average risk compared to others in the same category.
Some of the risks associated with this fund include stock market risk, commodity price risk, currency exchange risk, interest rate risk, and geopolitical risks. Returns are average compared to the fund's peers. The fund was created on Sept. 29, 1986.
Of the 105 funds (year-to-date) in the natural resources/basic materials category, the Fidelity Select Materials Portfolio is perhaps one of the most diverse without losing its focus. About 88% of fund assets are in basic material equities, with the rest falling into the consumer cyclical, financial services, and industrials categories.
There are more mid-size companies than large companies in the holdings, though there are far fewer small companies compared to the category average. The overall tilt is upper-middle or lower-large capitalization companies, with the average market cap totaling $25.17 billion. Morningstar gives this growth and value-oriented fund a four-star rating.