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Make Money in Promising Materials Stocks the Easy Way

By Selena Maranjian – Updated Apr 6, 2017 at 5:08PM

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There's no need to guess which company will fare best.

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect materials companies to prosper as our global economy regains its footing and construction and infrastructure rebuilding projects get under way, the iShares Dow Jones US Basic Materials ETF (NYSE: IYM) 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 basics
ETFs often sport lower expense ratios than their mutual fund cousins. The iShares ETF's expense ratio -- its annual fee -- is a relatively low 0.47%.

This ETF has performed rather well, substantially outperforming the S&P 500, on average, over the past three, five, and 10 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 very low turnover rate of 7%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.

What's in it?
Several of this ETF's components made strong contributions to its performance over the past year. International Paper (NYSE: IP) gained about 22% and has been investing in growth, buying up most of an Indian paper company recently, for example, and recently making a successful bid for Temple-Inland (NYSE: TIN). Cliffs Natural Resources (NYSE: CLF), meanwhile, is up 11% despite getting whacked by a big drop in the price of coal, though the long-term prospects for coal remain strong.

Other companies didn't add as much to the ETF's returns last year, but could have an effect in the years to come. Freeport-McMoRan Copper & Gold (NYSE: FCX) and Southern Copper (NYSE: SCCO) shed about 9% and 21%, respectively, as the price of copper dropped. Interested investors should note that Southern Copper's fall temporarily left it with a dividend yield north of 8%. My colleague Jim Mueller, meanwhile, finds Freeport tantalizing with its low production costs and strong balance sheet.

Aluminum giant Alcoa (NYSE: AA) shrank about 10%, but aluminum remains in strong demand commercially, and the company is benefitting from a little-known arrangement whereby Goldman Sachs maintains warehouses of aluminum and controls its release into the market.

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.

Learn about the best dividend ETFs. And if you're looking for some great investments beyond ETFs, consider these 10 stocks for your retirement portfolio.

Longtime Fool contributor Selena Maranjian holds no position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Alcoa Inc. Stock Quote
Alcoa Inc.
AA
Freeport-McMoRan Inc. Stock Quote
Freeport-McMoRan Inc.
FCX
$26.68 (-5.89%) $-1.67
Cliffs Natural Resources Inc. Stock Quote
Cliffs Natural Resources Inc.
CLF
$13.27 (-5.89%) $0.83
International Paper Company Stock Quote
International Paper Company
IP
$33.10 (-2.10%) $0.71
Southern Copper Corporation Stock Quote
Southern Copper Corporation
SCCO
$43.45 (-4.65%) $-2.12

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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