Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some global materials companies to your portfolio, the iShares MSCI Emerging Markets Materials ETF (Nasdaq: EMMT ) 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.
ETFs often sport lower expense ratios than their mutual fund cousins. The iShares ETF's expense ratio (its annual fee) is 0.69 %. It recently yielded a solid 3.5%.
The fund is very 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 too young to have a sufficient track record for evaluation. It underperformed the world market in 2011, and is lagging it so far this year. 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.
Our global economic slump won't last forever, and there are already signs of life here and there. Thus, the materials industry is poised to prosper as construction and infrastructure projects get under way and manufacturing kicks into a higher gear. Materials companies based in emerging markets have even more potential, as those economies tend to grow more briskly.
More than a handful of global materials companies had strong performances over the past year. Southern Copper (NYSE: SCCO ) , for example, surged 41% and recently yielded... 29%. Don't get too excited by that, though, as it reflects a one-time legal windfall being distributed to shareholders. (Its five-year average dividend yield is about 6%.) The company carries more debt than many peers, but it's aiming to boost its production by investing heavily in capital projects, and it may generate a lot of revenue in copper-hungry China. Some expect rising demand for copper to be paired with rising prices due to lower inventory levels , too. The stock recently got a thumbs-up from analysts at Citigroup (NYSE: C ) and the company has a lot going for it.
Brazilian steel company Gerdau (NYSE: GGB ) , up 20%, seems less attractive than Southern Copper, but as Brazil builds for the 2016 Olympics and the 2014 World Cup, among many other projects, its prospects may improve. Also boding well is Brazil's infrastructure projects, designed to boost the economy. Some analysts have downgraded Gerdau, citing disappointing profit margins and returns on equity.
Chemical and Mining Co. of Chile (NYSE: SQM ) , or Sociedad Quimica y Minera, gained 10%, reporting accelerating revenue and earnings growth rates in recent years, as well as a rapidly growing dividend (the recent yield is 2.7%). The producer of potassium nitrate, iodine, and lithium carbonate is poised to profit from fertilizer demand, as our planet will need to feed more and more people over time. After its last quarterly report, management cited higher volume and prices as favorable factors, but warned of pressure from softness in Europe.
Other companies didn't do as well last year, but could see their fortunes change in the coming years. Brazil-based Vale S.A. (NYSE: VALE ) , the world's second-largest mining company, gained just 1%, but it has much to recommend it, such as its modest exposure to troubled Europe. It has been challenged by slowing growth in China and cyclical commodity prices, but its diversification helps. As Brazil's largest railroad operator, it's looking to bid for rights to many more miles. Recently yielding 3.1%, the company's valuation is appealing, with a P/E of 5 and a forward P/E of 7.
The big picture
Demand for 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.