The materials sector is one of the most widespread sectors in the market. It is also a vital sector, as it deals with raw materials. Raw materials are the foundation for any manufacturing process, hence, proving its importance in the market. In the article going forward, let us become familiar with the definition of the materials sector, the different subsectors in it, and investment opportunities in some of the best performing materials sector ETFs.
What is the Materials Sector?
The materials sector is comprised of companies which are involved in the discovery, development and processing of raw materials. In other words, these companies are engaged in the manufacture and supply of basic products, such as glue and cardboard, which is used by other companies and industries. Therefore, as mentioned, this is that sector in the market, which other sectors are dependent upon.
What exactly are the “Materials” in the Materials Sector
The most popular materials within the materials sector include mined products, such as metal and ores, containers and packing products made up of cardboard, glass and metals, and chemical products as well.
Note that not all basic materials companies can be included in the materials sector. For example, through a metal mining company (a jeweller) is a basic materials processor, it is not included in the materials sector. Similarly, not all chemicals are considered as basic materials. For example, chemicals such as industrial fertilizers and paint additives are regarded as complex cleaning products or pharmaceuticals, not basic materials.
The makeup of the materials sector
The materials sector is composed of five major industries
As the name clearly suggests, these are the companies that are involved in the production of basic chemicals. This industry is divided into four sub-industries based on how and where the chemicals are used. The sub-industries are as follows:
- Commodity chemicals industry: Companies that produce basic chemicals such as plastics, synthetic fibres, films, paints and pigments, petrochemicals and explosives fall under the commodity industry. However, fertilizer and agriculture chemical producers are excluded from this industry.
- Fertilizers & Agricultural chemicals industry: These are the companies that produce fertilizers, pesticides, and other agricultural chemicals. Many think that this industry is a part of the commodity chemicals industry; however, it is not.
- Industrial gases industry: These companies produce industrial gases like hydrogen, helium, and nitrogen. These gases are then supplied to other companies and industries.
- Speciality chemicals industry: Companies that produce a wide range of specialized chemicals such as additives, polymers, adhesives, special paints, etc. are included in this sub-industry.
- Diversified chemicals industry: These companies produce all the other chemicals that are not produced by the above sub-industries.
Construction materials industry
Companies within this industry are involved in the manufacturing of basic products which are used to construct structures, such as buildings, bridges, and roads. For example, products such as cement and plaster are manufactured by this industry. However, this industry excludes companies that actually construct residential buildings and commercial buildings. They only provide the materials required its construction.
Containers and packing industry
This industry is again divided into two sub-industries, namely, metal and glass containers industry, and paper packing industry. The products covered in this industry are corks, caps, bottles, cardboard boxes, and paint cans.
Metals and Mining industry
The companies that are involved in mining producing, and processing a variety of metals and minerals, such as gold, silver, steel, aluminium, and gemstones come under this industry.
Paper and Forest Products industry
Companies in this industry produce paper and wood products, such as lumber and timber. Lumber and timber are usually used interchangeably; however, there is a thick line difference between the two. Timber refers to trees that are yet to be cut down and processed. On the other hand, lumber refers to the wood that has already been processed.
What Influences the Demand for Basic Materials
The basic materials sector is subject to demand and supply. Firstly, the demand for basic materials depends on the demand for consumer goods. Both of these are closely interrelated. If the demand for consumer goods increases, the demand for producing basic materials also increases.
The demand for basic materials is influenced by shifts in the housing markets as well. They go hand in hand, i.e., if new housing development speeds up, the demand for basic materials required for the construction of the building increases.
Basic Materials Stock Picks
There are many stocks in the basic materials sector to choose from. Following are some of the fundamentally analyzed basic materials stocks to invest in.
- Reliance Steel & Aluminum Co
This company is a metal service centre in the United States and Canada. As of the statistics in 2016, the company’s network was spread across 39 states in the U.S and 12 other countries. This company offers metal processing services, and also distributes over 100,000 to a range of industries.
In an investing point of view, it clears the criteria of fundamental factors such as sales, current ratio, long-term EPS growth, P/E ratio, and price/book ratio. Therefore, it is a good choice of investment in the mid-cap space.
- Nucor Corporation
This is large-cap stock in the iron and steel industry. This company is involved in the manufacturing of steel and steel related products. It produces direct reduced iron for its steel mills. There is three division of operation, namely, steel mills, steel products, and raw materials. Fundamentally, it clears most of the factors but fails in the price/book ratio. Hence, making it a decent investment pick.
- Kronos Worldwide, Inc.
Kronos Worldwide, Inc. is a small-cap stock in the chemical manufacturing industry. It is a producer and marketer of titanium dioxide pigments. The base product they produce has a wide range of applications. It supplies its products to domestic and international paint, plastics, and paper manufacturers. Coming to the fundamental view on the company’s stock, it meets all the criteria except the long-term EPS growth. Therefore, anyone looking to invest in the small-cap space; this stock can be a worthy choice.
Materials sector ETFs
Exchange-traded funds are the funds which track the entire sector. ETFs are an excellent way to keep your portfolio diversified. Following are some of the well-known ETFs in the materials sector.
- Vanguard Materials ETF
- Vanguard Materials Index Adm
- Fidelity® MSCI Materials ETF
- Materials Select Sector SPDR ETF
- PowerShares S&P SmallCap Materials ETF
- Vanguard Precious Metals and Mining Inv
- SPDR S&P Homebuilders ETF
- SPDR S&P Metals & Mining ETF
- iShares MSCI Global Gold Miners