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Investing in materials stocks
Investments that can thrive in a strong economy, but are risky in an economic downturn.
Many materials stocks offer dividends and can help diversify your investment portfolio. But as with any investment, knowing what to look out for could help mitigate losses.
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.
What industries does it include?
The materials sector includes companies that make basic materials that we use in everyday items. The five 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.
How to invest in the materials sector
When investing in the materials sector, you have two 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:
- Choose a brokerage. Compare brokerage platforms to select a firm that matches your financial goals.
- 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.
- Select your securities. Use your platform’s resources and research tools to read up on stocks and ETFs.
- Make a purchase. Place an order on a security you’d like to invest in.
- Track your investments. Log into your brokerage account to monitor your stocks or ETFs.
What stocks are in the materials sector?Select a company to learn more about what they do and how their stock performs, including market capitalization, the price-to-earnings (P/E) ratio, price/earnings-to-growth (PEG) ratio and dividend yield. While this list includes a selection of the most well-known and popular stocks, it doesn't include every stock available.
What ETFs track the materials sector?
Several popular ETFs that follow the materials sector include:
- Fidelity MSCI Materials ETF (FMAT)
- First Trust Materials AlphaDEX Fund (FXZ)
- Invesco S&P 500 Equal Weight Materials ETF (RTM)
- Materials Select Sector SPDR ETF (XLB)
- SPDR Metals and Mining ETF (XME)
- Vanguard Materials Index Fund (VAW)
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.
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. While the S&P 500 index dividend yield is 1.96% as of June 22, 2020, the SPDR S&P Metals and Mining ETF dividend yield is 3.03%. And a few individual stocks are boasting dividend yields closer to 6%.
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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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.
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