Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the materials industry to thrive over time as we keep building and repairing, the Guggenheim S&P 500 Equal Weight Materials ETF (NYSE: RTM ) 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 a lot of them simultaneously. An attractive feature of the ETF is that it weights its holdings equally instead of giving more importance to higher-cap ones. (And boding well for the industry is China's recent plan to spend more than a quarter of a trillion dollars on infrastructure.)
ETFs often sport lower expense ratios than their mutual fund cousins. The Guggenheim ETF's expense ratio -- its annual fee -- is a relatively low 0.50%. The fund is fairly small, though, 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, beating 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.
With a low turnover rate of 21%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.
What's in it?
More than a handful of materials companies had strong performances over the past year. Sherwin-Williams (NYSE: SHW ) , for example, nearly doubled, buoyed by expectations of a housing turnaround (finally!) along with price hikes to counter some rising raw material costs. Sherwin-Williams is also growing in developing economies such as Brazil. Some see the stock as pricey now, but at least its revenue has been growing.
Seed and herbicide giant Monsanto (NYSE: MON ) , meanwhile, advanced 38%, posting relatively consistent growth, enjoying relatively fat profit margins, and grabbing even more market share from rivals. It seems perpetually mired in controversy, though, for its genetically modified seeds and opposition to regulations requiring labeling of genetically modified items. (Russia recently banned genetically modified corn.) With an early spring lengthening the growing season, Monsanto's stock recently hit a 52-week high, and it's comparing well with rivals. Drought conditions could further spur demand for modified seeds.
Freeport McMoRan Copper & Gold (NYSE: FCX ) gained 16% over the past year, despite being hurt by low copper prices and global economic slowdowns. Meanwhile, 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, and has a balance sheet that's unusually strong thanks to a management that has earned a lot of respect.
Other companies didn't do as well last year, but could see their fortunes change in the coming years. Mosaic (NYSE: MOS ) , for example, shed 5% over the past year, but should get a boost from recent drought conditions. Indeed, Wall Street analysts have been upping ratings on fertilizer stocks, expecting strong performances. (Fertilizer bears, though, worry about oversupply and lower prices in the future.) Mosaic's revenue growth has been accelerating, though earnings growth has been lumpy. It sports far more cash than long-term debt, though, which isn't the norm among its peers.
The big picture
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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