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Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the basic materials industry to thrive as the world's economies eventually recover and construction projects proliferate, the PowerShares Dynamic Basic Materials ETF (NYSE: PYZ ) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously. The word "dynamic" in the ETF's name refers to the fact that the index it's based on seeks out companies best poised for capital appreciation within the industry.
ETFs often sport lower expense ratios than their mutual fund cousins. The PowerShares ETF's expense ratio -- its annual fee -- is 0.60%. The fund is fairly small, too, so if you're thinking of buying, beware of occasionally large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.
This ETF has performed rather well, outperforming the world market over the past three and five years. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
What's in it?
Many companies in this industry had a rough time over the past year. Coal and iron ore miner Cliffs Natural Resources (NYSE: CLF ) , for example, shrank by 55%, partly pressured by environmental regulations encouraging utilities to convert coal-firing plants to ones powered by natural gas. (The low price of natural gas these days doesn't help, either.) Still, it produces metallurgical coal, which is used in steelmaking, and thus isn't likely to go out of fashion. Many see the stock as a relative bargain these days.
Also looking attractive at recent levels is Freeport McMoRan (NYSE: FCX ) , down 34% over the past year. The price of copper has hurt its results lately, but its sinking stock price has also plumped up its dividend yield, and it's offering about 3.7% now. On the plus side for the company is that it's a low-cost producer of copper and molybdenum, positioning it to benefit quickly from upturns in metals pricing. (An eventual reversal of China's slowdown will also help.) Freeport enjoys economies of scale, and diverse operations, too.
Southern Copper (Nasdaq: SCCO ) , meanwhile, was essentially flat over the past year, though over the past decade, it has averaged 38% annual growth. It's currently yielding a tasty 6.7% and has been investing in upping its capacity, hoping to boost its business with China, which has been growing rapidly, despite its growth rate having slowed some. The company's second-quarter's earnings dropped 14% over year-ago levels, in part because of low metal prices.
Some basic materials companies did well, though. Newly public fertilizer company Rentech Nitrogen Partners LP (NYSE: RNF ) , for example, is up 75% so far this year, partly because nitrogen has done better than potash or phosphate recently. Also helping was our early spring this year, which had farmers planting earlier and thus requiring more fertilizer. The company has been upgrading and expanding its capacities, and its future looks promising. Don't focus too much on its 14.3% dividend, though, as it may not be sustainable. It's a master limited partnership, too.
The big picture
Long-term demand for basic materials isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.
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