Vanguard Materials ETF (VAW) – Solution for Equity Based Commodities Exposure

The combination of high inflation and weak equity markets make investors increasingly looking for hedges to improve performance of their sagging portfolios. Rising commodities prices appear to be a promising option worth considering. One of the less conspicuous instruments to obtain exposure to various industrial materials is the Vanguard Materials ETF (VAW) – which has indeed outperformed the S&P 500 by ~10% year-to-date. Like most Vanguard funds, the VAW ETF has a relatively low expense ratio (0.10%), is very well capitalized (market cap $2.9 billion), and has a relatively solid long-term performance track record: a 10-year average annual return of 11.1%. So, let's take a closer look at the Vanguard Materials ETF and see if it might be worthy of an allocation within a private growth-oriented portfolio.

As a result, commodity and materials prices are skyrocketing. Indeed, construction materials - year on year - are up the most in 50 years: +17.5% from 2020 to 2021. According to Statista, although the price of steel mill products stabilized in Q1 2022, after growing by roughly 142% in November 2021 in comparison with the same period of the previous year. Most metal and plastic products also had double digit price growth during the same period. However, that was not the only construction material with a large price increase. Number two were diesel fuel prices, which have grown by 63.8% during the same period, and in May 2021 it reached a peak of 199.5% on an annual basis. What comes third is lumber, as Canada's wood production wasn’t large enough to compensate for the amount the U.S. was ready to import from its neighboring country.

That being said, many investors might consider a good materials ETF to get exposure to rising prices through a diversified portfolio of materials producers. So, once again, let's take a closer look at the Vanguard Materials ETF: VAW.

VAW is specifically suited for those who want to stick to equities rather than commodities derivatives, during this market downturn cycle, but want to see his or her holdings outperform the broader market. Among the VAW’s top holdings are:

Linde PLC, Sherwin Williams Co., Freeport-McMoRan, Newmont Corp., Air Products and Chemicals, Dow Inc., Nucor and Ecolab. Especially interesting in this respect is Linde, a global leader in industrial gases and engineering – for the mere reason it supplies vital components for microchip and other semiconductor products such as inert gases, whose uninterrupted supply is now constrained by geopolitical fallout. Note that Linde was growing nicely even before the pandemic and acquitted itself quite well during the pandemic.

Linde's Q1 EPS report (Non-GAAP EPS of $2.93/share) was a beat on both the top- and bottom-lines. On top of that, Linde pays a $4.68/share annual dividend, currently yields 1.4% and trades with a forward P/E of 27.7x. LIN stock is up 9.6% over the past year, outperforming the S&P 500 by almost 10%. Morgan Stanley recently named Linde one of the best 15 stocks to "weather a bear market".