Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to load up your portfolio with some basic materials companies, the iShares Dow Jones US Basic Materials ETF (NYSEMKT: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.
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, beating the world market 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 low turnover rate of 11%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.
Why basic materials?
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.
Many basic materials companies had poor stock performances over the past year, and in some cases, that only makes them more attractive. Cliffs Natural Resources (NYSE:CLF) plunged 46%, leaving it with a hefty dividend yield of 6.9%. It has been whacked by the struggling coal industry, though some are bullish because of the recovering auto industry, since Cliffs' metallurgical coal is used in making steel. Some recent good news is China's plan to spend hundreds of billions beefing up its infrastructure, which will certainly spur demand for coal. Still, my colleague Chris Barker advises taking a cautious stance with Cliffs.
Peabody Energy (OTC:BTU), with its excellent ticker symbol, shrank by 35%. Unlike other coal concerns, it has been profitable, with rising revenue and earnings. The largest U.S. coal producer, it has even been called "the victorious King of Coal." The company took on a lot of debt to buy operations in Australia, but that positions it well to supply growing Asian demand -- though coal prices remain low. Some think that coal's glory days are over, but if you're bullish on it, consider Peabody.
Aluminum giant Alcoa (NYSE:AA) shed 19%. It's not profitable at the moment, but it still has a lot going for it, such as its exposure to fast-growing emerging markets. China's growth has been slowing, though, and some worry about a possible drop in demand for aluminum as manufacturers seek alternative materials, such as carbon fiber and ceramics.
Freeport McMoRan Copper & Gold (NYSE:FCX) fell by only about 1%, despite being hurt by low copper prices, higher costs of production, and global economic slowdowns. It's a low-cost producer of copper and molybdenum, positioned to benefit quickly from upturns in metals pricing. Freeport has a balance sheet that's unusually strong and an attractive valuation.
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.