Profit as the World Builds and Rebuilds

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.

The basics
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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Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, holds no position in any company mentioned. Check out her holdings and a short bio. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 31, 2012, at 10:12 PM, DrGoldin wrote:

    "An eventual reversal of China's slowdown will also help."

    Got an ETA on that?

  • Report this Comment On July 31, 2012, at 11:05 PM, paultaut wrote:

    On RNF, Rentech Nitro., You made the same comment before.

    You are focusing on its Fertilizer aspect, I'm focusing on its automotive expansion.

    A Diesel additive which will enhance its earnings and distribution rate.

    My expectation is that the $2.86 payout will be raised with this upcoming meeting.

    IMHO

  • Report this Comment On August 01, 2012, at 12:34 PM, tweenthelines wrote:

    ETF's (all of them) are foolish gizmo's whose main audience is traders and short sellsers (read dummies).

  • Report this Comment On August 02, 2012, at 10:51 AM, Decoy0527 wrote:

    Your comment that ETF's are for traders and dummies has no basis. ETF's are appropriate when an investor is bullish in a sector but wants to spread the risk to many companies rather than one or a few. Cost is reasonable. ETF's also provide access to many foreign companies that they an individual cannot get access to. Many good quality foreign firms are not traded on a USA exchange.

  • Report this Comment On August 06, 2012, at 4:05 AM, lanceim59 wrote:

    If anyone is into small-cap high growth mining stocks, you should look into Woulfe Mining (TSX-V symbol: WOF or OTCQX symbol: WFEMF). Back in February 2012, Warren Buffet invested $80 million in Woulfe Mining which is one of the largest tungsten producers in the world! Tungsten is one of the hardest metals and is used for the tips of mining drills as well as jewelry. Woulfe Mining is projected to start production in the Sanddong Mine(one of the largest tungsten mine in the world) some time in 2013.

    http://www.moneymorning.com.au/20120613/why-warren-buffett-i...

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