Investing in materials stocks

What are materials stocks?

Materials stocks make up the materials sector — one of the 11 major sectors of the stock market. These companies find, develop and process raw materials such as oil, timber and metal. Since most of these materials are used in construction and packaging, any changes in the business cycle and economy can affect their performance.

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What industries does it include?

The materials sector includes companies that make basic materials that we use in everyday items. The 5 major industries include:

• Chemicals. Those that convert raw materials to industrial chemicals, such as plastic.
• Construction. This industry comprises companies that deal primarily with the construction of buildings, roads and bridges.
• Containers and packaging. These professionals tackle the design and manufacture of various types of packaging, like aluminum food containers, paint cans and cardboard boxes.
• Paper and forest products. This industry is dedicated to growing and harvesting lumber, timber and paper.
• Metals and mining. These companies are responsible for locating and extracting metals and minerals like aluminum, gold and silver.

• What raw materials do companies in this sector control?

  Companies in the materials sector target specific resources that industries use for building, packaging and shipping. Companies often dabble in more than one raw material.

  • Aluminum. Some companies specialize in mining or producing bauxite, a principal ore of aluminum. Others manufacture and distribute aluminum products.
  • Chemicals. Companies that manufacture, transport, and sell chemical products used in agriculture, construction and electronics.
  • Copper. Those that mine and produce the raw material as well as copper-based goods, such as electrical wiring.
  • Gold. Companies that extract gold from mines.
  • Metals and minerals. Companies that produce metals and minerals for industrial and jewelry use.
  • Nonmetallic minerals. These mining companies pursue minerals, such as coal and nitrogen, for industrial and consumer applications.
  • Oil and gas. This subcategory includes drilling, refining and marketing crude oil and natural gas. It also includes any support equipment and services, such as pipelines to transport the fuel.
  • Steel and iron. Steel producers and providers that mine iron, who generally have operations around the world.
  • Synthetics. Providers that manufacture chemically synthesized goods, such as inorganic minerals like salt.

How to invest in the materials sector

When investing in the materials sector, you have 2 options: exchange-traded funds (ETFs) or individual stocks. ETFs track the sector and hold a basket of materials stocks, which lowers your exposure to risk by diversifying your portfolio. But they usually come with higher fees and pay lower dividends. Owning shares of individual stocks can offer higher payouts, but can be riskier.

Here’s a snapshot of how to invest in stocks and ETFs:

1. Choose a brokerage. Compare brokerage platforms to select a firm that matches your financial goals.
2. Open an account. Most brokerage accounts offer online accounts. While some don’t require a deposit to open, you’ll need to fund your account before you can purchase any investments.
3. Select your securities. Use your platform’s resources and research tools to read up on stocks and ETFs.
4. Make a purchase. Place an order on a security you’d like to invest in.
5. Track your investments. Log into your brokerage account to monitor your stocks or ETFs.

What stocks are in the materials sector?

What ETFs track the materials sector?

Several popular ETFs that follow the materials sector include:

How is the materials sector performing?

The stock market is in constant flux, and individual stocks can change prices quickly. But you can use the performance of ETFs to gauge the average performance of a sector over time. The graph below tracks the Materials Select Sector SPDR ETF (XLB), which can be used to track the performance of materials stocks. Note that figures are shown in US dollars.

Why invest in the materials sector?

Materials stocks provide the raw materials necessary to produce goods and services. These are popular investments because these companies tend to thrive in a strong economy.

Many materials stocks also generate regular cash flow and return cash to shareholders through consistent dividends. The SPDR S&P Metals and Mining ETF dividend yield is 1.03%, while the Vanguard Materials Index Fund ETF dividend yield is 1.46%. For comparison, the dividend yield of the S&P 500 index is 1.35% as of June 30, 2021.

A few individual stocks are boasting dividend yields well above this. For example, Compass Minerals International has a dividend yield of 4.4% as of June 9, 2021 and International Paper Company has a dividend yield of 3.5% as of August 13, 2021.

What unique risks does the materials sector face?

The materials sector is especially vulnerable to the global economy, international politics and fluctuating demand. For example, materials stocks can get caught in the crosshairs of geopolitical tensions and trade wars. Tariffs can lead to higher prices, which can delay or deter sales.

Materials stocks can also plunge when there is low demand, especially during economic recessions.

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Bottom line

The materials sector may be a good option if you’re looking for cash dividends and the potential for profit in a flourishing economy. But it comes with unique risks because of its sensitivity to the global economy, trade and politics.

Be sure to explore your online trading platform options to pick a brokerage account that best fits your investment portfolio.

Frequently asked questions

• Is the materials sector cyclical?

  Yes. Materials stocks are cyclical, which means they’re highly sensitive to macroeconomic changes. They generally do well when the economy is thriving.

• Can materials stocks deal with multiple raw materials?

  Yes, some companies may extract multiple raw materials. For example, gold companies may also mine for other metals, such as copper or silver.

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