The materials sector helps satisfy consumersâ need for material goods.
© FertnigâE+/Getty Images
Humans have long had an insatiable appetite for materialsânatural resources, chemicals, building products, and everything in between. Materials-focused companies, including those listed in the S&P 500, operate to satisfy our demand for these physical products.
Materials are made up of commodities, the raw substances mined or harvested from the earth that go into making numerous productsâmany involving construction. Investing in commodities stocks is one way to diversify your portfolio to include this sector. (Another way is to invest in the commodities themselves by trading futures contracts based on the prices of raw materials.)
Key Points
- Materials include building products, paper products, chemicals, and natural resources.
- Demand for these materials is notoriously cyclical.
- Not many materials companies are household names.
If youâre considering investing in the materials sector of the stock market, knowing its key characteristics and the major players can help you make smarter decisions.
What is the materials sector?
The materials sector includes companies that engage in the discovery, development, or processing of raw materials. Materials companies may produce or manufacture chemical products, metals, construction materials, packaging, or paper and forest products.
Have you started saving toward retirement? If so, great! But how do you decide what to invest in?
EncyclopĂŠdia Britannica, Inc.
Materials is one of 11 sectors defined by the Global Industry Classification Standard (GICS). The sector formally encompasses five industries:
- Metals and mining: Companies in this sector may mine aluminum, copper, steel, gold, silver, other precious metals and minerals, or other diversified metals.
- Construction materials: Companies that manufacture construction materials, including cement, concrete, glass, brick, tile, or other building products.
- Containers and packaging: Businesses that make metal containers, glass containers, or paper packaging.
- Chemicals: Manufacturers in this industry may produce fertilizers or agricultural chemicals, commodity chemicals, diversified chemicals, industrial gases, or specialty chemicals.
- Paper and forest products: Companies that make paper and forest products, including pulp, paper, lumber, plywood, or other wood-based products.
Key characteristics of the materials sector
What distinguishes the materials sector? Chiefly, its cyclicality. Because the companies in this sector supply most of the materials used in construction, their fortunes typically rise when the economy is booming and fall when itâs weak. High commodity prices often boost the prices of materials sector stocks.
Other core characteristics of companies in the materials sector are:
- Capital intensive. Exploring for, extracting, processing, and producing natural resources or other materials isnât cheap. Companies in this sector typically have high capital needs.
- Resource dependent. The availability and costs of natural resources can significantly impact the operating expenses of materials companies. The supply chains for many of these companies are highly complex and geographically distributed.
- Highly regulated. Materials companies are typically obligated to comply with many stringent regulations, including environmental rules, and health and safety standards.
- Significant impact on the environment. Despite regulations to limit environmental damage, materials companies may be implicated in land disturbances, waste generation, and emissions with large carbon footprints.
- Pose safety risks. Materials companies employ policies to avoid workplace accidents, but risks to human safety persist. The operations of many materials companies create inherently hazardous working conditions.
Buffered by government reserves?
Government stockpiles and reserves can help offset the cyclicality of the materials sector. During periods of economic downturn, governments may provide price support to materials companies by increasing stockpiles.
Industry leaders in the materials sector
The materials sector comprises hundreds of companies, including some prominent players. Here are a few notable names.*
Metals and mining
- Alcoa Corporation (AA): Makes aluminum, alumina, and bauxite with operations in mining, refining, smelting, fabricating, and recycling
- Freeport-McMoRan Inc. (FCX): Mines copper, gold, and molybdenum in Indonesia and the Americas
- Newmont Corporation (NEM): Produces gold and copper, with mines in North America, Africa, Australia, Latin America, the Caribbean, and Papua New Guinea
Construction materials
- Cemex, S.A.B. de C.V. (CX): Produces and distributes cement, ready-mix concrete, and construction aggregates
- Martin Marietta Materials Inc. (MLM): Supplies building materials such as aggregates, cement, ready-mixed concrete, and asphalt; also produces high-purity magnesia and dolomitic lime products
- Vulcan Materials Company (VMC): Produces construction aggregatesâcrushed stone, sand, and gravelâand aggregates-based construction materials, including asphalt and ready-mix concrete
Containers and packaging
- Amcor PLC (AMCR): Makes packaging for food, beverages, health care, home and personal care, pet care, and other products
- Avery Dennison Corporation (AVY): Manufactures labels and packaging materials for a range of consumer goods
- Ball Corporation (BALL): Best known for glass storage containers; also produces beverage cans and bottles, aerosol cans, household and personal care bottles, and aluminum slugs
Chemicals
- Corteva, Inc. (CTVA): Manufactures fungicides, herbicides, insecticides, and seed treatments for agricultural uses
- Dow Inc. (DOW): Produces hundreds of specialty industrial chemicals using nearly 100 brand names
- DuPont de Nemours, Inc. (DD): Makes a diversified range of chemicals and other materials under nearly 50 brand names
Paper and forest products
- International Paper Company (IP): Manufactures paper-based packaging, pulp products, and a variety of other paper products for industrial uses
- WestRock Company (WRK): Makes paperboard, folding cartons, corrugated containers, specialty packaging, and merchandising displays
- Weyerhaeuser Company (WY): Produces lumber, plywood, and various engineered wood products
Investing in the materials sector
If you decide to buy stocks or bonds of materials companies, you can begin by creating a short list based on what interests you. From there, conduct researchâand plenty of itâto analyze your choices before deciding which companies to invest in.
Another approach is to invest in a fund thatâs focused on the materials sector. The most common fund types are mutual funds and exchange-traded funds (ETFs). Both may hold baskets of materials stocks, with mutual funds and some ETFs being actively managed. A fund under active management can generate attractive returns, but may also require you to pay hefty management fees.
Chemicals, natural resources, building materials, and paper products are core to the global economy. That may attract you to invest in materials companies, but donât forget about the inherent cyclicality of this sector. If your materials sector investments are part of a diversified portfolio strategy, you may be well positioned to handle the ongoing volatility in this industry group.
*Specific companies and funds are mentioned for educational purposes only and not as an endorsement. The lists in this article are representative and not intended to be comprehensive.
This article was most recently revised and updated by Allie Grace GarnettThis article was most recently revised and updated by David Schepp
