Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some materials stocks to your portfolio, the Materials Select Sector SPDR ETF (NYSEMKT:XLB) 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 materials ETF's expense ratio -- its annual fee -- is a very low 0.18%. It recently yielded 2.3%.
This ETF has performed rather well, topping the world market over the past 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 12%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.
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 materials companies had some tough times over the past year, but some did not. Paint giant Sherwin-Williams (NYSE:SHW) soared 68%, thanks in part to the housing market finally seeming like it's turning around. The company recently bought global paint giant Comex, based in Mexico, for $2.3 billion. Some don't like that the deal will add to its debt, but others see it as a smart strategic move. The company just reported fourth-quarter earnings, with record revenue up 8.8% and earnings up more than 50%. Some see the stock as pricey now, but with a promising future.
Cliffs Natural Resources (NYSE:CLF), on the other hand, sank 47% (though that's up from an earlier depth). It's yielding nearly 7%, but that's mainly due to the stock-price drop. (It has more than doubled its payout over the last year, too.) Cliffs has struggled along with the coal industry, but is poised to get a boost from a recovery in manufacturing and the auto industry, but some still see struggles ahead. It's taking a massive charge against its fourth-quarter results, though, dismaying some investors. And its reliance on a few major customers worries some, too.
Freeport McMoRan Copper & Gold (NYSE:FCX) dropped 21%, 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. It's also diversifying away from copper a bit, moving into oil and gas exploration. Freeport has a balance sheet that's unusually strong, an attractive valuation, and a 3.6% dividend yield. Its fourth-quarter earnings report was stronger than expected.
Aluminum giant Alcoa (NYSE:AA) shed 13%. It's not profitable at the moment, but 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. My colleague Christopher Barker sees an improving competitive position for Alcoa, due in part to lower energy costs.
The big picture
Long-term 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.