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.
The materials sector includes companies that make basic materials that we use in everyday items. The 5 major industries include:
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:
Several popular ETFs that follow the materials sector include:
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.
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.
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.
If you’re planning on buying stocks or ETFs, you’ll need a brokerage account. Compare your options to find the best fit.
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.
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