Materials Sector

The materials sector is one of the ten Global Industry Classification Standard (GICS) economic sectors. The materials sector consists of companies that explore, discover, develop, and process raw materials. Sometimes also referred to as the “basic materials” sector, it includes the mining and refining of metals, chemical production, and forestry products.

The materials sector is one of the ten Global Industry Classification Standard (GICS) economic sectors. The materials sector consists of companies that explore, discover, develop, and process raw materials. Sometimes also referred to as the “basic materials” sector, it includes the mining and refining of metals, chemical production, and forestry products.

The materials sector is sensitive to changes in the business cycle. Because the sector supplies materials used in other sectors for things like manufacturing and construction, its fortunes rely heavily on a strong market with significant consumer spending. This sector is also sensitive to supply and demand fluctuations, due to the demand for the commodities these companies produce.

Understanding the Materials Sector

The materials sector is cyclical so that when economic growth slows there is less demand for the products and services that use the materials these companies produce. Conversely, this sector typically sees a boost during economic recovery periods. However, because the sector is so diverse, some subsectors have their own unique cycles and may boom or collapse independently from other materials.

Over long periods, the materials sector generally outperforms the rest of the economy. During the first decade of the 21st Century, materials returned at 150 percent versus the overall average of 105 percent experienced by companies in the S&P 500. Of course, during a weak economy, this sector will also underperform other sectors. Thus, during the US recession of 2007-2009, the materials sector lost roughly 56 percent while the S&P 500 experienced an average of 54 percent loss. However, since the US economy began its recovery in 2009, the materials sector has only seen returns of 130 percent on average, as compared with 133 percent for the S&P 500.

With growing middle class populations in large, emerging nations like China and India, the world demand for food and other materials is rising. Agricultural products and materials like coal, metal, sand, tar, and concrete (all used in construction) all fall within the materials sector. Similarly, after the global economic downturn following the US recession in 2008, many nations around the world began using gold as a reserve currency. This boosted global demand for gold as a commodity to an all-time high and sent stock prices for gold producing companies skyrocketing.

Investing in the Materials Sector

Investing in the materials sector is relatively easy. Investors can pursue this in two ways: investing in the companies or investing in the commodities they produce. As with any sector, individual stocks are available for purchase, or investors can participate in mutual funds or exchange-traded funds (ETFs).

Many investors like coupling investments in materials with investments from other, related sectors. For example, maybe a technology sector company will use rare metals for the production of one of their products and the demand for that product expects to be high.  Investing in the materials sector companies that supply the raw materials might be a good way to bring higher yields from investments based on the same research.  Consult with a financial adviser for advice on the best strategy to meet specific financial goals.