Canadian Materials Sector is Back in Focus
The Canadian Materials sector is back in focus after a tough 2022.
Over the past six months, the Canadian Materials sector has been rallying and is now up approximately 10%. This compares to the performance of the S&P/TSX index (+3%) and the S&P500 (-2%) over the same timeframe.
In fact, on a relative basis, only the Technology sector has outperformed Materials within Canada over the past six months, up approximately 25%—largely due to the outperformance of Shopify (which makes up 38% of the S&P/TSX Technology Index).
Here, we take a closer look at what the Canadian Materials sector encompasses and why it’s back in focus for investors.
Canadian Materials sector overview
The Canadian Materials sector is a collection of publicly traded, Canadian-listed companies that provide goods and services related to commodity-based manufacturing industries, including:
- Metals & Mining
- Chemicals
- Construction Materials (Steel, Cement)
- Packaging
- Forest Products (Paper, Lumber and Panels)
The Materials sector is the fourth-largest sector within the S&P/TSX Index, making up approximately 12% of the overall index. As of March 8, 2023, it has a combined market capitalization of approximately $368 billion.
The top 10 constituents (and their respective weights) in the Materials sector of the S&P/TSX Index are as follows:
- Nutrien (17%) - Producer of crop inputs and services, most notably fertilizers.
- Barrick Gold (11%) - International gold miner/producer.
- Franco-Nevada Corp (10%) - Mining resource royalty and investment company.
- Agnico Eagle Mines (8%) - International gold miner/producer.
- Teck Resources (7%) - Integrated natural resource company.
- Wheaton Precious Metals (7%) - Precious metals streaming company.
- First Quantum Minerals (5%) - Base/precious metals miner/producer.
- CCL Industries Inc. (3%) - Specialty packaging company.
- Yamana Gold Inc (2%) - Precious metals miner/producer.
- Ivanhoe Mines (2%) - Base/precious metals miner/producer.
This clearly shows there is a large weighting towards Metals & Mining companies in Canada, both in terms of base metals (copper, aluminum, zinc, etc.) and precious metals (gold, silver, platinum, etc.).
What’s driving the recent outperformance?
The Canadian Materials sector is largely a commodity-driven sector due to its tilt towards Metals & Mining companies. This usually means that commodity prices ultimately determine the path of profitability and outperformance for companies within the sector.
While the unpredictable nature of commodity industries can be a concern for investors many have conceded that we may be in a secular commodity “super-cycle” given the substantial increase in demand for materials such as base metals, in conjunction with a constrained supply.
The recent reopening of China from Covid lockdowns has spurred the sector given its massive population and growing industrialization, which feeds its vast demand for materials. This is especially evident in the case of base metals, where China and other emerging markets will be absorbing the majority of new production capacity.
Exposure to the Canadian Materials space
iShares S&P/TSX Capped Materials Index ETF (XMA)
For those seeking broad-based exposure to the Materials sector within Canada, iShares XMA could be a solid choice. This ETF provides good exposure to the sub-sectors within the Materials space at a reasonable 0.60% expense ratio. The ETF is also fairly liquid and maintains good size—with an AUM of $305 million.
Data as of March 8, 2023.
Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.
