WisdomTree Materials ETF : Sector Gains With Less Volatility

Few days go by when the "Mad for Life" stock enthusiast, James Cramer, fails to promote one of his favorite companies, Freeport-McMorran (FCX). The materials mega-corp explores and mines for copper, silver and gold, and it has seen its share prices double in 2007 alone. (Give Jimbo a bit of credit!)

Yet Cramer's basic thesis is a familiar one to investors everywhere. The world needs "stuff," from steel to copper to timber to oil. And the world... China, India, Eastern Europe... isn't about to end its quest for resources anytime soon.

Fair enough. Yet these stocks are often whacked pretty hard by the ever-changing forecasts for global economic growth. A slowdown in China, or even the mere mention of the possibility, might seriously crimp Freeport's style.

We witnessed Freeport-McMorran (FCX) drop 25% in the summertime, simply because the Fed wasn't going to cut interest rates. We watched FCX drop 25% in the fall, simply because the Fed hinted in mid-October that it might refrain from further rate cuts. In other words, it's hard to look at an individual material producer/miner as an "indestructible" hold.

There's a more sensible way to capture Jim's long-term, bull market prognosis. First, you recognize that the need for "stuff" is an international need. That means, you want an international investment. Second, you realize that diversification in the materials segment will minimize some of the downside risk.

Third, you think in terms of "free money" via dividend payments. Freeport (FCX) gives you 1.9% annually to play. Yet, what if you could do better than the 4.4% of the 30-year U.S. bond as a risk premium for participation? Then you might find a home with the WisdomTree International Basic Materials Sector Fund (DBN).

WisdomTree's International Basic Materials Sector Fund (DBN) gives you access to Europe and the Asia/Pacific regions -- from England to Australia to Japan to Germany. And the names in the list are major players from BHP Billiton (BHP) to Arcelor Mittal (MT).

Granted, Freeport (FCX) fits the "best of breed" mold that Cramer espouses. And it's outperforming the Wisdom Tree Index handily.

Nevertheless, that victory comes at a gut-wrenching, stomach-churning price. Freeport's extreme volatility means that you may catch it above or below WisdomTree's International Basic Materials Sector Fund (DBN).

In essence, we're still talking about an aggressive sector investment with DBN. However, if you wish to go with the reduced volatility and higher dividend stream rather than the craziness of a single company's price movement, then you may just come to the same conclusion as I have.

Comments

[nlretired:]

I can't find that DBN has paid any dividends.

2007 Dec 07 09:21 AM

[49er:]

I missed what the yield is on DBN, except that is supposed to be better than 30 year US bonds (4.4%). I would be interested in seeing a comparison of DBN with BCF and GGN, which are CEFs.

2007 Dec 07 09:49 AM