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The Stuff Things Are Made Of

Think of the Basic Materials sector as a thick stew of assorted industries. From extracting and processing metals, chemicals and construction materials; to harvesting timber; to smelting ores to create aluminum and steel; to fabricating cardboard and other paper packaging materials; to producing fertilizers, insecticides and other agricultural products… the basic materials group is a one-pot meal. Can you think of the most popular and talked about chunk inside? That’s right… gold. And not far behind, diamonds—a girl’s best friend, so they say. But what about the cardboard box it’s shipped in? Hey, it’s just not fair.

Not only are the businesses in this sector so varied, they also tend to be cyclical with the economy. What we mean to say is, the stock prices of these companies are prone to large swings up and down. When times are good, these companies really take off. But overproduction soon follows, resulting in a glut and tumbling prices.

As with utilities, we prefer to hold these company shares in an Exchange Traded Fund (ETF). Rather than picking only one or two companies, ETFs “mine” the diversity of this sector.

Still, because of the volatile nature of these companies, we typically hold only a small position relative to a person’s total portfolio. Too much of a rich diet can result in an Alka Seltzer® moment. But as with gold and diamonds, a little goes a long way!

(Some companies in the Basic Materials sector include E.I. DuPont de Nemours (aka ‘DuPont’), Dow Chemical, Monsanto, Ecolab, and Praxair).

*Source: S&P Materials Sector Fund (XLB) Top 5 Holdings by Weight as of 1/20/2016. For example only - not intended as a recommendation.

NOTE: Maxwell Noll Investment Advisors is a fee-only advisor. Investment recommendations will be made only after a thorough review of current assets and risk tolerance, and a management agreement has been executed. Please refer to Form ADV-2 for fee structure and other important information.