Small-Cap Materials Stocks: Lots of Room for Growth

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some small-cap materials stocks to your portfolio, but don't have the time or expertise to hand-pick a few, the PowerShares S&P Small-Cap Materials ETF (NASDAQ: PSCM  ) could save you a lot of trouble. Instead of trying to figure out which small-cap materials stocks will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. This ETF, focused on small-cap materials stocks, sports a relatively low expense ratio -- an annual fee -- of 0.29%. The fund is fairly small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF is young, but it has topped the world market over the past three 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.

Why small-cap materials stocks?
As the global economic recovery gains traction, demand should grow for materials used in construction, manufacturing, and infrastructure projects. Thus, small-cap materials stocks stand to benefit. And small companies have more ability to grow briskly.

More than a handful of small-cap materials stocks had strong performances over the past year. AK Steel Holding (NYSE: AKS  ) , for example, soared 81%. Some expect the recovering auto industry and price hikes to benefit the company, and Goldman Sachs blessed it with a positive outlook last month, too. Bears don't like AK Steel's pension and health-care obligations to retirees, though, and worry that carmakers might decrease their demand for steel in favor of lighter carbon fiber. (The auto industry generates about half of AK Steel's revenue.)

Flotek Industries (NYSE: FTK  ) , a drilling and production-related specialist, gained 69%. Its third-quarter revenue jumped 25%, while net income was below year-ago levels. The company's chemical sales were hurt by the flooding in Colorado earlier this year, but management noted that, "The acquisition of Florida Chemical is already providing both marketing and production synergies that should lead to meaningful revenue and profit growth in the quarters ahead."

Globe Specialty Materials (NASDAQ: GSM  ) , specializing in silicon metals and alloys, surged 34%. The company topped some expectations for revenue in its recently reported quarter, but revenue dropped 14%. China was blamed, in part, for dumping a lot of silicon in Canada. Globe Specialty Materials has announced a stock buyback plan, valued at up to $75 million. It has also boosted its capacity by acquiring Siltech.

Other small-cap materials stocks didn't do quite as well during the last year, but could see their fortunes change in the coming years. Stillwater Mining (NYSE: SWC  ) dropped 3%, as the sole public U.S. producer of platinum and palladium has profited from platinum-group metals pricing increases. Those are due, in part, to growing auto sales, and also to labor unrest in South Africa, a competing production region. Stillwater Mining has a new CEO and, in its last quarter, reported a net loss, though revenue growth was robust. It also greatly reduced the value of its Argentinean copper reserves.

The big picture
If you're interested in adding some small-cap materials stocks to your portfolio, consider doing so via an ETF. 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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