New York, USA – The iShares U.S. Basic Materials ETF (NYSEARCA: IYM) is an exchange-traded fund that tracks the Russell 1000 Basic Materials RIC 22.5/45 Capped Index. This passively managed fund offers exposure to the basic materials industry in the US market. It primarily invests in mid to large market capitalization firms within the Basic Materials sector listed in the United States, with many of its companies having global operations in industries like metals and mining, chemical, construction materials, paper, forest products, and containers and packaging.

Investing in the basic materials sector, as represented by IYM, may pose challenges within a diversified ETF portfolio. Despite potential for outperformance in specific scenarios, other industry sectors and funds may offer superior performance metrics, such as fees and liquidity. The fund has struggled to consistently outshine the category leader, the Materials Select Sector SPDR® Fund ETF (XLB), mainly due to differences in their underlying indices’ weighting systems.

When analyzing the holdings of IYM, it is evident that the fund has a significant concentration in Linde plc, a global provider of industrial gases. While IYM may offer a differentiated approach to the basic materials sector, its holdings closely resemble those of XLB, a peer fund with lower fees and higher liquidity. Overall, XLB presents a more favorable investment option compared to IYM due to its cost-effectiveness and performance metrics.

In terms of market performance, IYM’s valuation at 23.5x trailing 12-month earnings suggests a discount compared to the S&P 500. The fund’s portfolio projects double-digit earnings growth over the next five years, indicating potential for future price appreciation. However, the lack of significant yield may deter some investors from considering IYM as a standout choice in the market.

Despite certain environments where the basic materials sector may outperform, there are alternative assets that exhibit stronger performance under similar conditions. XLB, with its superior liquidity, lower fees, and better risk-adjusted performance, emerges as a more favorable option for investors seeking exposure to the materials sector. Therefore, based on these considerations, IYM is rated as a sell for investors.